CASH BALANCE PLANS

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CASH BALANCE PLANS are the most popular type of “hybrid” defined benefit (DB) plans.  They express benefits in terms of a single lump sum payment – just as defined contribution (DC) plans do.  Hybrid plans can take several forms, including:

  • “cash balance” plans with individual accounts that grow with pay and interest credits, and
  • “pension equity” or “life cycle” plans with lump sums based on pay and years of service.

Cash balance plans are an excellent solution for professional firms that:

  • want to set aside (and deduct) more than $50,000 for owners or partners,
  • want to retain a link between owners’ contributions and benefits,
  • have a reliable earnings stream, and
  • can afford a generous contribution to employees (usually 5% to 7½% of pay).

Traditional defined benefit plans are often a good choice for single-owner firms – but they don’t work well for multiple-owner firms because there’s no direct link between owners’ contributions and the benefits they receive.  Partners can end up subsidizing each other’s benefits.  A cash balance plan solves that problem: owners’ contributions are directly reflected in their own account balances, just as they are in a DC plan.

HERE’S A GRAPH of the deductible contributions possible with a cash balance / profit sharing / 401(k) combination.  401(k) and profit sharing, as defined contribution plans, are limited to $50,000 plus a $5,500 catchup starting at age 50. But the cash balance plan is a defined benefit plan, so deductible contributions can be much larger – and on top of – the $50,000 DC limit. Maximum cash balance credits reach a peak of more than $200,000 at age 62.

For more information, follow current topics on the cash balance plan section of our retirement plan blog or contact us at cashbalance@vaniwaarden.com.

© 2012 Northern Consulting Actuaries, Inc. dba Van Iwaarden Associates.