It’s Time to Get Serious About Cash Balance Plans

Find out what a cash balance plan is, how it can help small business employers, and how you can find cash balance plan prospects.

Oct 05, 2018

This post was written by Joe Long, an external wholesaler with BPAS who has over 30 years of experience working with small business defined contribution and defined benefit plans.

Small business owners are looking for ways to reduce tax liability, save for retirement and develop an exit strategy. Many overestimate the value of their business and underestimate the amount of income they will need to replace at retirement.

Plus, 72% have taken no exit planning action.1 About 37% of owners want to transfer their business to family members.2 As a result, small business owners need help in creating an exit strategy whether they plan to sell their business or transfer it to a family member.

Growth of Cash Balance Plans

The Cash Balance Plan may offer solutions to the issues facing small business owners mentioned above. These plans allow business owners to make much larger tax-deductible contributions to their accounts compared to defined contribution plans such as SIMPLE-IRAs, SEPs and 401(k) plans.

For this reason, the use of Cash Balance Plans has grown steadily since 2006, when final regulations were issued. The number of active plans has grown 328% between 2009 and 2016.3 In 2016, the total number of plans grew 30% from the previous year.4 This compares to about 1% growth in new 401(k) plans.5

What is a Cash Balance Plan?

The Cash Balance Plan was created in 1985, but did not catch on until the release of the PPA 2006 rules. This legislation clarified many uncertainties surrounding the operation of these plans and created a framework for establishing new plans. Before that time, many Cash Balance Plans were simply converted Defined Benefit Plans sponsored by Fortune 500 companies as a way to reduce costs.

However, due to the unique design features and benefits of Cash Balance Plans, most new plans have been adopted by small, professional firms, such as doctors, lawyers, engineers and architects.

The modern Cash Balance Plan offers features that combine the benefits of defined contribution plans with the higher contributions of defined benefit pension plans. Many small business owners are able to contribute around $250,000 per year or more to their own account on a fully tax-deductible basis.

Combining a current 401(k) Plan with a new Cash Balance Plan will provide the most flexibility in design and contributions, plus allow partners to have different benefit formulas while reducing overall employee contributions as much as allowed by law.

Since these plans are considered defined benefit plans, mandatory contributions are required and everything is reviewed by an actuary each year to make sure the rules are followed and employees receive a non-discriminatory benefit. Unlike defined contribution plans, all investment decisions are made by the employer and their financial advisors.

Target Employers

As mentioned earlier, these plans primarily appeal to small professional employers. These could be small businesses with or without employees. There are many successful non-employee businesses in the US that operate without common law employees. In all cases, they share certain characteristics:

  • Professional employer with high, steady cash flow
  • Currently maxes out 401(k) or similar plan
  • Would like to save substantially more for retirement
  • Owners make $200,000 or more per year
  • Feel they are paying too much in income taxes
  • Is concerned with creditor exposure on personal assets
  • Owners are older on average than employees and are typically age 45 or older

Finding Potential Clients

Advisors can use a wide variety of methods to create a targeted list of prospects, including starting with your current business or wealth management clients. In many cases, these clients are looking for solutions to the issues listed above and don’t know where to turn.

Once current clients have been approached, begin tapping into your centers of influence such as CPAs, practice managers, attorneys and benefit consultants. Many are already working with potential Cash Balance Plan clients and can help you open the door to an introduction.

As an advisor, you can expand your circle of referral sources by holding CE credit events for CPAs in your area. This might include a lunch or breakfast meeting in the CPA firm’s office or in your office, if targeting smaller firms. Cash Balance Plans can be discussed, as well as other similar topics, to provide the CPAs with a broad range of educational content, in addition to providing needed CE credit.

Drip campaigns can be used as well to provide CPAs in your area with timely third-party articles or white papers on these and other tax issues facing small business owners. You can become a source of valuable content that will help educate your referral sources, while establishing yourself as a serious member of their team of experts.

Putting It All Together

When you identify a potential Cash Balance Plan prospect, it is important to get permission to run a plan design report. A current census report is critical to the design process and to demonstrate the benefit of these plans to the owner. It would also be very helpful to have a copy of the current 401(k) plan document.

Once the design is ready, it’s time to present to the owner and other key consultants, such as their CPA, business manager, etc. Based on the result of this meeting, tweaks can be made to further meet cash flow, benefit and tax-deduction goals.

Most plans run on a calendar year basis and must be established by December 31st in order to allow current-year tax deductions. Contributions can be delayed until the tax return due date (including extensions) of the business, normally September 15th of the following year.

You will work with the employer to invest plan assets to hit a target net return as established in the plan document. Returns higher or lower than this target may result in a decrease or increase of required contributions in the future.

Due to the complexity of these plans, it is important to have an expert available to help with all phases of the design and setup process and to ensure your client understands benefits, contribution obligations, all IRS, DOL and PBGC rules and plan costs.

Because of higher tax rates and a loss of certain tax deductions, high-net-worth business owners are looking for help. You may be able to offer them a solution with a Cash Balance Plan.

For information about BPAS Cash Balance Plan services, contact Joe Long at JLong@bpas.com or by calling 866-401-5272, ext. 5028, or email us at trustsales@bpas.com.

  1. Manganaro, Jon. “Small-Business Owners Remain Prime Candidates for Advice.” PlanAdvisor Asset International, 20 Apr. 2016. Web. 10 Jul. 2016.
  2. Manganaro, Jon. “Small-Business Owners Remain Prime Candidates for Advice.” PlanAdvisor Asset International, 20 Apr. 2016. Web. 10 Jul. 2016.
  3. “2018 National Cash Balance Research Report” Kravitz, 22 Aug 2018.
  4. “2018 National Cash Balance Research Report” Kravitz, 22 Aug 2018.
  5. “2018 National Cash Balance Research Report” Kravitz, 22 Aug 2018.