Written by the Rebalance360 Retirement Plan Team
For successful business owners with steady revenue, a Cash Balance Plan can be an excellent retirement savings vehicle. Though some risks should be considered, the major benefits that Cash Balance Plans offer include significant tax deductions and accelerated savings.
What are Some of the Benefits of a Cash Balance 401(k) Plan?
A cash balance 401(k) plan combines features of both traditional defined benefit pension plans and defined contribution plans like a 401(k). It’s sometimes referred to as a hybrid pension plan. Here are some benefits of a cash balance 401(k) plan:
- Predictable Benefit Amount: Unlike traditional 401(k)s where the final benefit depends on the investment returns, cash balance plans promise a specific benefit at retirement, typically a percentage of annual pay plus an interest credit.
- Less Investment Risk for Employees: The employer typically bears the investment risk in cash balance plans. The employee receives a promised account balance regardless of how the plan’s investments perform.
- Portability: Employees can often take the vested portion of their cash balance benefit with them if they leave the job. This can either be in the form of a lump sum or a rollover into another retirement plan.
- Flexibility for Employers: Employers can structure the contributions in a manner that aligns with their financial goals and workforce strategy. They can offer more generous contributions to older or more tenured workers if they choose.
- High Contribution Limits: For older employees, cash balance plans often allow for larger deductible contributions than traditional 401(k) or profit-sharing plans. This can be beneficial for catching up on retirement savings.
Who is eligible for a Cash Balance Plan?
A Cash Balance Plan can be designed to provide different levels of benefit to different employees, as long as annual non-discrimination requirements are satisfied. For example, in some cases a plan could provide $100,000 per year to business owners and 2% of compensation to other eligible employees. At the minimum level, a Cash Balance Plan must cover the lesser 40% of employees or 50 employees.
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