Cash Balance Plans for Employers

If your company already contributes 3-4% to employees’ accounts, or at least is willing to do so, a Cash Balance Plan can be established for the benefit of employees, especially key executives and highly compensated employees. Typical plans provide contributions between 5% and 7% of pay for all staff. 

The higher contribution limits — as high as $70,000 to $400,000 depending on your age — make Cash Balance Plans especially beneficial for partners or owners over 40 years of age who wish to “catch up” or accelerate pension savings

Quick facts

• Contributions on behalf of both owners and employees are tax-deductible for the business.
• Contribution limits are determined by the participant’s age.

By combining a Cash Balance Plan with a 401(k) or profit-sharing plan, employers can maximize the amount owners and HCEs can be credited within the Cash Balance Plan. By making minimum required profit-sharing contributions in a 401(k) plan, the two plans can be cross-tested. Here are some things to consider:

• To cross-test your Cash Balance Plan and 401(k), you must meet the minimum required profit-sharing contributions in a 401(k) plan. This is usually 5%, but it may be more.
• Under the test, profit-sharing and cash balance credit are viewed as the same, and are factored together. For example, if an employee receives 5% profit-sharing and 1% cash balance contribution, then under the test they’ve received a total of 6% contributions and credits. 
• If your 401(k) plan is a safe harbor plan, and the employer contributes the non-elective 3% safe harbor contribution, this can also be used in the cross-testing.

In addition to the business providing a back-stop for investment earnings and contribution amounts specified in the plan documents, most plans are insured by the Pension Benefit Guaranty Corporation (PBGC) – a US government agency.

PBGC insurance is not required for every plan, however. If your business or plan meets one of the following criteria, you can forego the insurance:

• Professional service employer ² with 25 or fewer employees
• The plan only covers substantial owners (defined as more than a 10% interest)
• Native American tribal plans
• Church plans ³ 

Cash Balance Plans can achieve and maintain tax-deferred status. To do this, the Cash Balance Plan must meet its annual funding obligations regardless of the profitability or investment performance of any given year.

The Cash Balance Plan’s underlying investments will have their own risks.

Employer Fees

One-time Actuarial Set-up Fee: $2,000

Annual Plan Maintenance and Actuarial Fee: $2,950 per year

Annual PBGC insurance (if applicable) : $500 per year

Ongoing Actuarial Services

Compliance Testing Participant Levels

$125 per participant up to 10

$80 per participant from 11 to 100

$25 per participant greater than 100

For a plan with 5 participants: $5,525 initial plan year / $3,535 subsequent years

Owner-Only Plans

Annual Administration Fee: $1,900 per year (assuming a single-person plan, there will a $125 charge for each additional participant.)

Plan Asset Fees

There is a fee charged quarterly on overall plan assets that are invested in non-Saturna funds. This is on a sliding scale based on current plan assets.

A Cash Balance Plan is an IRS-qualified defined benefit pension plan that can help business owners and highly compensated employees accelerate their retirement savings. They are a defined benefit plan where the employer determines the participant's cash benefit using actuarial formulas, not based on investment account balances. 

A Cash Balance Plan can be an attractive option for businesses looking to:

• Offer competitive retirement savings options: plan participants enjoy higher contribution limits and guaranteed rates of return
• Potentially benefit from tax advantages: contributions on behalf of both owners and employees are tax-deductible for the business.

Employees tend to enjoy Cash Balance Plans because they offer these benefits:

• More in contributions: Cash Balance Plans typically offer higher contribution limits than 401(k)s and SEP, with limits increasing as they age.
• More stability: Cash Balance Plans have a guaranteed annual rate of return on accounts, independent of investment performance.

For employees, their employer credits the account annually with a percentage of their pay or a flat amount, plus a guaranteed rate of return.

Contributions on behalf of both owners and employees are tax-deductible for the business, providing significant tax savings.

Cash Balance Plans can achieve and maintain tax-deferred status if it meets its annual funding obligations regardless of the profitability or investment performance of any given year.

With Cash Balance Plans, participants do not contribute to the account, nor do they direct the investments of the account.

Additionally, balances in the accounts are not affected by investment earnings.

Participant accounts grow in two ways:

1. Employer Contributions: The company credits either a percentage of pay or a flat dollar amount determined by a formula specified in the plan document.
2. Account Growth: Accounts grow annually with a guaranteed rate of return, which is independent of the plan’s investment performance. 

Participants in a Cash Balance Plan receive an annual guaranteed rate of return. The rate of return changes annually and typically follows the yield on 30-year Treasury bonds. 

However, the plan can be designed to tie the rate of return to other market-based rates, including the historical performance of the underlying plan investments. often tied to the yield on 30-year Treasury bonds.

Cash Balance Plans are defined benefit plans, meaning that the participant's cash benefit payable from the plan is determined by actuarial formulas instead of by a participant's investment account balance. The formula for crediting the participant’s account is set in advance according to a formula described in the plan documents and adjusted annually by the plan’s actuary at a date set by the plan. 

The business sponsoring the plan then makes a contribution to the plan which is actuarially determined to be necessary to fund the calculated benefit.

When participants leave the company, they are eligible to receive the vested portion of their account according to a vesting schedule specified in the plan document. A participant’s vested account balance can be paid in a lump sum or, if the balance is over $5,000, as an annuity. 

Participants that have not reached the IRS age for penalty free retirement account distributions may want to transfer a lump distribution to an individual retirement account to avoid penalties for early withdrawal.