Does a Cash Balance Plan Work for Your Firm?
Many business owners and professional service firms are looking for additional ways to defer income. This goal is difficult given the limitation of deductions for qualified retirement plans. Because of the provisions in the Pension Protection Act of 2006 a hybrid plan design, called the cash balance plan, has become increasingly popular. But what is a cash balance plan? And what does it take to to justify?
The cash balance plan design is a hybrid plan which combines the attributes of both the defined contribution and defined benefit plans. The features include:
· Separate hypothetical accounts for each employee
· Asset protection
· Dramatically increased deductions for principals
Firms that will benefit from the cash balance plan design include:
· Principals who desire to contribute more than the defined contribution limits for 2012 $17000 defined contribution and $33000 profit sharing plus catch up of $5000 if applicable.
· Companies already contributing at least 3 – 4% to employees or are willing to.
· Companies which have demonstrated consistent profit patterns.
· Partners or owners over 40 years of age who desire to "catch-up" or accelerate their pension savings.
Obviously the cash balance plan design does not work for all firms however when it works it is a very attractive alternative to ‘juice’ up your retirement savings. There can be 20 years of saving for retirement packed into 10 years or less. Some additional drawbacks include the need for an actuary each year, which adds cost. However in many cases the benefits far outnumber the costs. An analysis would be necessary to determine if this plan design works for your company.