Cash Balance Plans
A cash balance plan represents an opportunity for owners of small to mid size companies to make large contributions of up to $200,000 for themselves without having to contribute exorbitant amounts to their staff. In fact, companies already utilizing cross-testing when making profit sharing contributions will only see a minimal increase in contributions to the staff.What is a cash balance plan? Well, it is a hybrid of the old defined benefit plans that companies used to have that promised a monthly benefit when you retired. The old defined benefit plan does not have an annual contribution limit, unlike your standard 401(k) profit sharing plans that has a limit of $49,000 per person (in 2011). We use the contribution rules from the defined benefit to fund the owner's contribution in the cash balance plan, then we use testing rules to make a 5% to 7.5% contribution for the staff in the company's 401(k) profit sharing plan. Sounds complicated, right? Well just look down below to see some examples that will help you visualize what can be done.
Now, a cash balance plan is not for everyone. Here are some criteria that should be met before you consider this plan:
- Your company should have a proven track record of profitability
- Your company should not be susceptible to economic swings (such as construction or mortgage companies)
- The owner(s) should be over 40 with a staff that on average is 10 to 15 years younger
- You must be able to commit to funding the plan for at least 5 years
- The owner(s) want contributions of at least $70,000 per year
Do you want more information or want to get a free plan design example like the ones below? Call us at (888) 689-5530 x235 or email info@retirementplanners.com. If you do want a plan design example we will need an employee census from you - click here to view the census information we will need.
Here are some sample 401(k) & Cash Balance combo plan designs:
Example 1
| Name | Age | Owner | Salary | Employee Deferral | Safe Harbor & Profit Sharing | Cash Balance | TOTAL |
| Owner | 60 | 100% | $245,000.00 | $22,000.00 | $32,500.00 | $104,500.00 | $159,000.00 |
| Employee 1 | 63 | $40,000.00 | $0.00 | $3,000.00 | $3,000.00 | ||
| Employee 2 | 64 | $60,000.00 | $0.00 | $4,500.00 | $4,500.00 | ||
| Employee 3 | 30 | $80,000.00 | $0.00 | $6,000.00 | $6,000.00 | ||
| Employee 4 | 38 | $80,000.00 | $0.00 | $6,000.00 | $6,000.00 | ||
| $505,000.00 | $22,000.00 | $52,000.00 | $104,500.00 |
Example 2 - Young owners with young staff
| Name | DOB | DOH | Hours | Wages | Employee Deferral | Safe Harbor & Prft Shr | Cash Balance |
| Employee | 1/11/1978 | 1/23/2008 | 1000 | $55,446.65 | $0.00 | $3,326.80 | $0.00 |
| Owner | 12/8/1971 | 7/26/1998 | 1000 | $320,000.00 | $16,500.00 | $32,500.00 | $73,000.00 |
| Wife | 10/4/1973 | 7/26/1998 | 1000 | $84,999.00 | $13,494.00 | $12,121.00 | $62,000.00 |
| Employee | 3/21/1980 | 6/4/2007 | 1000 | $23,000.00 | $0.00 | $2,515.00 | $0.00 |
| Employee | 4/10/1972 | 7/8/2002 | 1000 | $382,679.19 | $12,090.00 | $27,600.00 | $0.00 |
| Employee | 4/23/1978 | 7/14/2004 | 1000 | $46,830.58 | $0.00 | $2,809.83 | $0.00 |
| Employee | 10/28/1982 | 9/21/2009 | 499 | $6,645.63 | $0.00 | $2,515.00 | $0.00 |
| Employee | 5/21/1988 | 5/20/2007 | 1000 | $29,920.40 | $0.00 | $2,515.00 | $0.00 |
| Employee | 4/20/1979 | 6/16/2003 | 499 | $7,519.20 | $403.73 | $2,515.00 | $0.00 |
| Employee | 1/22/1957 | 8/29/2001 | 999 | $31,446.15 | $0.00 | $2,515.00 | $0.00 |
| Employee | 1/19/1971 | 4/8/2002 | 1000 | $61,522.90 | $0.00 | $3,691.37 | $0.00 |
| Employee | 4/9/1961 | 9/7/2007 | 1000 | $64,963.35 | $0.00 | $3,897.80 | $0.00 |
| Employee | 4/2/1979 | 8/13/2007 | 1000 | $33,974.49 | $0.00 | $2,515.00 | $0.00 |
| Employee | 1/1/1970 | 10/29/2003 | 1000 | $73,671.65 | $2,600.00 | $4,420.30 | $0.00 |
| Employee | 1/1/1970 | 5/17/2006 | 999 | $36,515.75 | $0.00 | $2,515.00 | $0.00 |
| $1,259,134.94 | $45,087.73 | $107,972.11 | $135,000.00 |
Example 3
| Name | DOB | Owner | Comp | Employee Deferral | Safe Harbor & Profit Sharing | Cash Balance Plan | TOTAL |
| Owner1 | 2/26/1967 | Y | $120,000.00 | $16,500.00 | $5,561.00 | $70,000 | $92,061.00 |
| Owner2 | 9/26/1973 | Y | $120,000.00 | $16,500.00 | $5,561.00 | $70,000 | $92,061.00 |
| Owner3 | 11/16/1968 | Y | $120,000.00 | $16,500.00 | $5,561.00 | $70,000 | $92,061.00 |
| Owner4 | 11/20/1965 | Y | $40,000.00 | $16,500.00 | $3,000.00 | $0.00 | $19,500.00 |
| Employee | 4/17/1972 | N | $65,000.00 | $0.00 | $4,875.00 | $0.00 | $4,875.00 |
| Employee | 10/11/1972 | N | $54,000.00 | $0.00 | $4,050.00 | $0.00 | $4,050.00.00 |
| Employee | 7/5/1982 | N | $48,000.00 | $0.00 | $3,600.00 | $0.00 | $3,600.00 |
| Employee | 6/9/1976 | N | $45,000.00 | $0.00 | $3,375.00 | $0.00 | $3,375.00 |
| Employee | 8/20/1987 | N | $30,871.00 | $0.00 | $2,315.00 | $0.00 | $2,315.00 |
| Employee | 9/11/1980 | N | $25,000.00 | $0.00 | $1,875.00 | $0.00 | $1,875.00 |
| Employee | 7/23/1984 | N | $20,000.00 | $0.00 | $1,500.00 | $0.00 | $1,500.00 |
| $66,000.00 | $41,273.00 | $210,000.00 | |||||
| Total employer contribution: | $251,273.00 | ||||||
| Amount to Owners: | $229,683.00 | ||||||
| Percent to Owners: | 91.41% | ||||||
