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Why Offer A Cash Balance Plan?
Cash Balance (CB) plans have been around since the mid 1980’s, so why are they being implemented at a greater rate than 401(k) plans? Because they’re worth it!
A CB plan is a Defined Benefit (DB) plan that looks like a Defined Contribution (DC) plan. This IRS-qualified retirement plan is known as a hybrid. Each employee has a theoretical account balance credited annually with service credits (usually paybased) and interest credits. These interest credits are defined and guaranteed by the employer, including plans that define the interest credit as equal to the plan’s actual rate of return with a 0% minimum over an employee’s career, or use a conservative fixed rate or a treasury rate. These account balances are theoretical and need not equal plan assets. Assets are pooled, and benefits are paid out in the form of a lump sum or annuity.
Contribute More
CB plans are perfect for employers who are high wage earners and are currently maximizing contributions in their existing DC plan but would like to contribute more. CB contributions are in addition to, not instead of, DC plans. When combining a CB and DC plan, an employer should expect annual contributions for employees to be a minimum of 7.5% of pay. By doing this, an employer could potentially max out their contributions. An employer can supercharge their savings and get 20 years’ worth of savings in half the time, which is key as recent studies show most Americans are not saving enough for retirement.
Offset Taxes
Recent increases in Federal, State and Local taxes have cut into business profits. More CB plans are being set up to help offset rising taxes. CB contributions reduce both taxable and Adjusted Gross Income (AGI), so business owners potentially could move into a lower tax bracket. Generally, a significant portion of the tax-deferred savings will benefit the business owner. The following examples illustrate the power of the CB plan.
- 55-year-old owner could potentially get a CB contribution of $220,000, plus $61,000 in DC contributions, plus $6,500 in 401(k) catch up contributions for a total of $287,500 annually!*
- For a high wage earner in NYS, for example, $200,000 in tax-deferred savings will lower taxes by $74,000 in Federal Taxes (Top rate 37%), $13,700 in NYS taxes deferred (top rate of 6.85% excluding “millionaire” tax), $1,800 in Obamacare Medicare taxes saved (0.9%) and, if employer is a C-Corporation, $5,800 in Medicare taxes saved (combined EE/ER rate 2.9%) for a total tax reduction of $95,300.
- $87,700 in tax deferrals
- $7,600 in permanent tax savings (If you retire to a state without income tax, the State tax deferrals turn into permanent savings)
- Complicated combined plan tax deduction rules apply to small professional service employers with 25 or fewer active participants. These contribution amounts are examples.
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