A Cash-balance Plan Might Be The Answer For Small Biz

2008-09-19 Word Count: 524 Category: Finance

ACCOUNTING TODAY: September 4-17, 2006
FINANCIAL PLANNING
News and strategies for the personal financial planner

By Lance Wallach

Many profitable small-business owners would like to have a retirement plan that can provide more than $50,000 of deductible contributions to the owners and other key employees. A defined benefit plan is perhaps the only tax-qualified retirement plan that can achieve this. However, in traditional DB plans, the worker benefit costs are too high to make them practical. A cash balance plan is the solution:

A cash-balance plan sample

Census data Cash-balance Plan

Name/Position
Age
Salary Employer
Contribution
Owner 1 64 $220,000 $239,360
Owner 2 51 220,000 108,240
Worker A 49 70,000 5,040
Worker B 37 65,000 4,680
Worker C 30 62,000 4,464
Worker D 32 60,000 4,320
Worker E 28 56,000 4,032
Worker F 36 30,000 2,160
Worker G 30 25,000 1,800
Worker H 44 25,000 1,800
Worker I 48 22,000 1,584
Worker J 44 20,000 1,440
Worker K 41 20,000 1,440
Worker L 48 15,000 1,080
Worker M 67 12,000 864
Worker N 55 11,000 792
Plan Totals $933,000 $383,096
Owners Total 440,000 347,600
Percent to Owners 47
*Assumes that the company will maintain their existing 401(k) plan and provide at least a 5% of pay contribution to all non-key employees to satisfy the "top heavy" minimum requirements for BOTH plans under IRC 415.

Unlike other defined benefit plans, a cash balance plan may be designed to better control the cost of the rank-and-file employee benefits. A cash balance plan may be designed to either level the owner's contributions, despite wide differences in age (not shown), or to optimize each owner's contribution. Chart Above. As the example also illustrates, the typical cash balance plan often results in over ninety percent of the benefits being derived by the business owners.
The cash balance plan uses an innovative allocation method allowable under the Internal Revenue Code to provide comparable benefits to the owners, when compared to the average benefit awarded to the employees. "Comparable" need not be equal. This ability makes cash balance plans feasible in many situations where a classic defined benefit plan would be too costly.
Unlike traditional defined benefit plans that are often underappreciated, a cash balance plan awards each participant a specific contribution, and the plan guarantees that it will grow at a fixed rate selected by the business owner. The retirement benefit may simply be the cash balance.

Its advantages include:
? Acquiring tax deductible life insurance;
? Protecting assets from creditors;
? Guaranteed retirement and survivor benefits;
? Leveling owner contributions, if desired;
? Easy to understand;
? Larger plan contributions and tax deductions; and,
? The ability to combine with a 401(k) plan.

The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.