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Cash Balance FAQs

Cash Balance Plans

  • A retirement plan that looks like a 401(k)/Profit Sharing Plan, but has significantly higher deductible contribution limits. Because they combine characteristics of different kinds of plans, Cash Balance Plans are sometimes referred to as Hybrid Plans.

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  • Each participant has a “hypothetical” account balance that grows each year with employer contributions (called pay or principal credits) and interest credits. Account balances are hypothetical because there is really just one pooled account for all plan participants, but from the participant’s standpoint, there’s nothing hypothetical about it; the balance represents the benefit to which they are entitled.

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  • A cash balance plan looks and feels like a 401(k) Plan from the participant’s standpoint. An account grows each year with employer contributions and interest. However, the plan assets are pooled and the employer directs how the money is invested. Interest is guaranteed on participants’ accounts and may not necessarily follow the plan’s actual investment return on assets.

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  • Interest credits are chosen by the plan sponsor, are specified in the plan document, and can be either a flat amount or tied to an index (e.g. – 30-year Treasury rates). Click here for a more in-depth analysis of the interest crediting options. Again, this is a key difference between Cash Balance Plans and 401(k)/Profit Sharing Plans. No matter what the pooled assets do, account balances grow at the specified interest credit rate.

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  • Because plan assets are pooled but account balances earn “guaranteed” interest credits, it is usually desirable for actual returns to match the interest crediting rate as closely as possible each year. Because of this, plan assets are typically professionally managed to ensure that the plan provides dependable, predictable levels of deductible contributions.

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  • Yes, like any qualified retirement plan, assets are protected from corporate creditors.

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  • A participant can choose to roll over or take a cash distribution of their vested hypothetical account balance. Since the benefits are from a defined benefit plan, they also follow defined benefit rules. If the account balance is over a certain threshold, the participant must also be given a choice of an annuity form of payment.

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  • A Cash Balance Plan, especially when added on top of an existing 401(k)/Profit Sharing Plan, is a solution that allows the business owner(s) to increase pre-tax savings enough to achieve a comfortable standard of living in retirement. Small business owners who have dependable high levels of income, who may already have a 401(k)/Profit Sharing Plan, and who would like to save more than $59,000 per year on a tax-deferred basis are likely to benefit from a Cash Balance Plan.

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  • Unlike 401(k)/Profit Sharing Plans, in which deductible contribution limits are generally uniform for everyone, the maximum deductible amounts in a Cash Balance Plan vary considerably by age, with much larger contributions possible for older individuals.

    Examples of Maximum Annual Contributions to

    401(k), Profit Sharing & Cash Balance Plans

    Age 401(k) Only 401(k) w/ Profit Sharing Cash Balance Total Maximum
    60-65 $24,000 $59,000 $247,000 $306,000
    55-59 $24,000 $59,000 $189,000 $248,000
    50-54 $24,000 $59,000 $145,000 $204,000
    45-49 $18,000 $53,000 $111,000 $164,000
    40-44 $18,000 $53,000 $85,000 $138,000
    35-39 $18,000 $53,000 $65,000 $118,000

    (Contribution levels based on 2016 limits. Actual contribution amounts may depend on IRS compliance testing results)

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  • Yes. A Cash Balance Plan can be designed with varying benefit levels, or “tiers”, for individual partners. For example, one benefit level could be $150,000 per year, another $100,000 per year, and another $0. Further, employees will usually participate at a much lower level than the business owners (8% to 10% of pay is typical).

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  • Yes. Although benefit levels should not be changed on a regular basis, a Cash Balance Plan can generally be amended to increase, decrease or even eliminate benefit levels for any or all participants. Note though that there are certain restrictions on lowering the interest crediting rate.

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  • Contact Independent Actuaries, Inc. at 503.520.0848, and a consultant will request basic information about your business. We will then produce a customized illustration that will demonstrate the contribution levels that can be obtained. From there, we can work with you and your advisors to refine the illustration to best meet your objectives. Should you decide to proceed, we will draft the required plan documentation to create the plan, and you can start making deductible contributions.

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