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Cash Balance Plans

In the previous newsletter, “Pension Plans and Fireworks”, we looked at two examples where a qualified retirement plan can be implemented to provide tax-deductible retirement savings for an owner-only business. Those examples illustrated situations in which an owner can accumulate tax-deferred contributions that can be rolled over to an IRA when the owner retires or decides to terminate the plan. In this newsletter, we will discuss Cash Balance Plans, which can work well for partnerships or companies with employees.

Cash Balance Plans are attractive because they share qualities of both Defined Benefit Plans (DB Plans) and Defined Contribution Plans (DC Plans, such as 401(k) or Profit Sharing Plans). Similar to a DC Plan, the benefit in a Cash Balance Plan is thought of as an account balance, which is easy to understand and is appreciated by employees. Similar to a Traditional DB Plan, the benefit consists of strictly employer contributions. Because a Cash Balance Plan is a type of DB Plan, the employer can generally make larger contributions than allowed under a DC Plan. As shown in the example below, an owner can contribute up to $61,000 to a DC Plan for 2018, assuming they have attained age 50 by the end of the year. The same owner may contribute over $200,000 per year to a Cash Balance Plan, depending on their age, years of service, and number of years they will participate in the plan.

Age When Plan Adopted Age at Retirement Number of Years Contribution is Made Level Contribution Each Year 401(k) PS Plan* Lump Sum at Retirement Age 401(k) PS Plan Level Contribution Each Year Defined Benefit Plan Lump Sum at Retirement Age Defined Benefit Plan*
57 62 5 $61,000 $337,000 $256,000 $1,416,000
52 62 10 $61,000 $767,000 $225,000 $2,831,000

*Based on 2018 IRS limits, and assuming a 5% rate of return or interest credit.

For a sole-proprietor or husband-wife company, there would be no advantage to having a Cash Balance Plan over a Traditional DB Plan. For a larger company, there are situations where a Cash Balance Plan might be preferable. For example, with a partnership, a Cash Balance Plan works well if the partners want to contribute a specific amount for each partner in a given year. The annual contribution can be expressed as a dollar amount or percent of pay, and can be changed as needed over the life of the plan.

For a company with employees that sponsors or intends to sponsor a DC Plan, the addition of a Cash Balance Plan can allow the owners to contribute and deduct substantially more while still directing a majority of the contribution to owners.

With tax season winding down, now is a great time to have IAI prepare a plan design study to show what the tax benefits of a Cash Balance Plan can do for your company. In order to make a contribution and have a 2018 deduction, a plan document must be in place by December 31st. If you are interested in exploring a qualified plan, please contact us at 503-520-0848 or at

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This article was written by Kerry M. Smith, ASA, EA, MAAA and Josh Harris, ASA, MAAA. Kerry’s specialties and areas of interest include designing proposals and working with aggregate plan designs, like floor offset and cash balance plans. Josh’s specialties and areas of interest include Other Post-Employment Benefits and Accounting Standards for retirement plans.