Cash Balance Plans, Are They Worth It?

Question?

If Cash Balance (CB) plans have been around since the mid 1980’s, why are they growing at a rate of 30% while 401(k) plans are only growing at 3%?

Answer: Because they are worth it!

What is a Cash Balance plan?

A CB plan is a Defined Benefit (DB) plan that looks like a Defined Contribution (DC) plan. Previously, we’ve explained the differences between DB and CB plans. But now, let’s talk about “Why” they are worth it.

Perfect Fit for High Wage Earners

CB plans are perfect for employers who are high wage earners and are currently maximizing contributions in their existing DC plan, but want to contribute more. CB contributions are in addition to, not instead of, DC plans. When combining a CB and DC plan, an employer should expect annual contributions for employees to be a minimum of 7.5% of pay. By doing this, an employer could potentially “max out” their own contributions and supercharge their savings by generating 20 years worth of savings in half the time. This is important, as recent studies have shown that most Americans are not saving enough for retirement.

CB Plans Help Offset Rising Taxes

The recent increases in Federal, State and Local taxes have cut into business profits.  As a result, more CB plans are being set up to help offset rising taxes. CB plan contributions reduce both taxable and Adjusted Gross Income (AGI), so business owners can potentially move into a lower tax bracket. Generally, a significant portion of these tax-deferred savings will benefit the business owner. Annual CB contributions could potentially be $50,000 to over $200,000 (age based) and are often in addition to the DC plan contribution. To put that into perspective, a $200,000 Cash Balance credit could mean a $90,000 tax deferred savings at 45% plus additional permanent tax savings. I would say that is one way to supercharge your retirement savings!

CB Plans Help Recruiting

As you can see, the benefits are impressive for business owners. They can also be a great recruitment tool to attract and retain the best talent. Employees benefit from these plans through increased employer contributions, in addition to their salary deferrals. This is more important than ever before as, according to the Employee Benefit Research Institute (ERBI), the average 401(k) balance is only approximately $64,000. Employees do not bear the investment risk and the benefits are portable and can be rolled into an IRA.

Overall Awareness

In addition to the tax savings and increased retirement contributions, Financial Advisors and Accountants are now more aware of these plans and are presenting them to their clients. BPAS works closely with the advisor and accounting community and will gladly help with these discussions. As you can see from the information above, for the right business owner these plans are worth it.

If you would like to discuss more about Cash Balance Pension plans and how our experience could benefit you, please contact Jason Disco at [email protected] or 315-703-8916.