Cash Balance Pension Plans are a type of defined benefit retirement plan that can allow business owners and highly compensated employees to save significantly more for retirement than traditional defined contribution plans. These plans combine features of a traditional pension with the flexibility and transparency of an account-based structure.

A Cash Balance Pension Plan credits each participant with a set annual contribution, typically expressed as a percentage of compensation or a flat dollar amount, along with an interest credit. At retirement or upon plan termination, benefits are generally payable as a lump sum that may be rolled into another qualified retirement plan or IRA, or as a lifetime annuity.

Benefits of a Cash Balance Pension Plan

Cash Balance Pension Plans can offer several advantages for the right type of business:

• Contribution limits can be substantially higher than those available through 401(k) or profit-sharing plans, particularly for older owners or partners
• Owners and partners may receive different contribution levels based on plan design and demographics
• Employer contributions are generally tax deductible, which can meaningfully reduce current taxable income
• Plans can be paired with an existing 401(k) to create a coordinated retirement strategy
• At retirement or plan termination, plan assets are typically portable to other qualified retirement vehicles

A Cash Balance Pension Plan is not for Everyone

While powerful, these plans are not a fit for every business. A Cash Balance Pension Plan may not be appropriate if:

• Owners are not interested in contributing more than the limits available through traditional retirement plans
• The business is unable or unwilling to make required contributions for eligible employees
• Company cash flow or profitability is inconsistent
• Owners are not prepared to commit to maintaining the plan for several years

How a Cash Balance Pension Plan Works

To operate effectively, a Cash Balance Pension Plan generally requires a long-term commitment. Employers must make contributions for eligible employees and typically plan to maintain the plan for at least five years. Contribution limits are actuarially determined and are largely age-based, meaning allowable contributions often increase as participants get older.

Plans are customized based on company goals, ownership structure, employee demographics, and existing retirement plans. In some cases, select key employees may be included in the Cash Balance Plan to provide enhanced benefits as part of a broader compensation or retention strategy.

Each plan design is unique. The right structure depends on factors such as the age of the owners, number of employees, compensation levels, and desired contribution targets.

Determining the Right Fit

A Cash Balance Pension Plan can be an effective tool for businesses looking to accelerate retirement savings and reduce current taxes, but it requires careful analysis and proper design. If a Cash Balance Plan is not the right solution, there may be alternative retirement plan strategies that allow owners and highly compensated employees to increase contributions through enhanced profit-sharing or other plan features.

Let us meet to determine if the Cash Balance Plan makes sense for your company.  If a Cash Balance Plan isn’t a good fit, but you still want to contribute more to your company’s retirement plan, we will find a plan that allows the owners and/or highly compensated employees to receive a higher amount of profit sharing and/or maximize their deferral portion

If you have questions or would like to learn more, contact Joshua Rapp at Jrapp@cornerstonetrust.net or 952-844-2579.