Benefits of a Cash Balance Plan: A List of Our Favorite


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A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s. In a cash balance plan, the employer contributes a fixed amount, or “cash balance,” to an account for each employee, which earns a guaranteed rate of return. The employee’s account balance is portable and can be taken with them if they leave the company.

Benefits of a cash balance plan

Self-employed individuals can set up a cash balance plan as a solo plan, meaning they are both the employer and the employee. Solo cash balance plans offer several advantages for self-employed individuals, including:

  1. Predictable cost: Solo cash balance plans provide a predictable cost for funding retirement benefits, which can be helpful for budgeting and financial planning. The self-employed individual must contribute a fixed amount to their account, typically based on a percentage of their income.
  2. Tax benefits: Solo cash balance plans offer tax benefits for self-employed individuals. Contributions to the plan are tax-deductible, and the investment earnings on the account balance are tax-deferred, allowing the individual to save on taxes until retirement.
  3. Customization: Solo cash balance plans can be customized to fit the needs of the self-employed individual. They can choose the contribution rate and the formula for calculating the guaranteed rate of return, and they can allocate their contributions among investment options.
  4. Portability: Solo cash balance plans offer portability, which means that the self-employed individual can take their account balance with them if they change businesses or stop working.

To set up a solo cash balance plan, the self-employed individual will need to work with a plan administrator to develop the plan document and

A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s. Cash balance plans offer several tax benefits for both employers and employees.

Here are some of the tax benefits of a cash balance plan:

  1. Employer tax deduction: Employer contributions to a cash balance plan are generally tax-deductible for the employer as a business expense. This means the employer can claim a tax deduction for the contribution amount when calculating its annual taxable income.
  2. Employee tax-deferred contributions: Employee contributions to a cash balance plan are generally tax-deferred, meaning that the employee only pays taxes on the contributions once they are withdrawn from the plan at retirement. This allows employees to save on taxes until retirement.
  3. Employee tax-deferred earnings: The investment earnings on the account balance in a cash balance plan are tax-deferred, meaning they are not taxed until they are withdrawn from the plan at retirement. This allows employees to save on taxes until retirement.

Cash balance plans offer many tax benefits for employers and employees, including tax-deductible employer contributions, tax-deferred employee contributions, and tax-deferred investment earnings. It is important for employers and employees to review the tax implications of a cash balance plan carefully and to consult with a qualified tax professional to understand the full extent of the tax benefits.

Plan Downsides?

Here are some of the disadvantages of cash balance plans:

  1. Complexity: Cash balance plans can be complex for employers and employees. They involve several legal and regulatory requirements, and the calculations used to determine the pay formula and account balances can be complicated.
  2. Potential for discrimination: Cash balance plans have been the subject of controversy and legal challenges because of the potential for discrimination against older and longer-tenured employees. In some cases, cash balance plans have been found to provide lower benefits to these employees than traditional defined benefit plans.
  3. Limited investment options: Cash balance plans typically offer a limited range of investment options compared to defined contribution plans (DC plans) such as 401(k)s. This can limit the potential for higher investment returns and may not be suitable for employees who want greater control over their investments.
  4. Limited flexibility: Cash balance plans offer little flexibility regarding the employer contribution rate and the formula for calculating the guaranteed rate of return. This may not be suitable for employers who want more control over the plan’s costs.
  5. Fees: Cash balance plans may involve costs for services such as investment management and plan administration. These fees can reduce the overall returns on the account balance and may be a disadvantage for employees.

Cash balance plans have advantages and disadvantages, and employers and employees must consider them carefully.

What is the cost of setting up a cash balance plan

The cost to set up a cash balance plan will vary depending on factors, including the employer’s size, the complexity of the plan design, and the services required to set up and administer the plan. A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s.

Here are some potential costs associated with setting up a cash balance plan:

  1. Plan design and drafting: The employer may incur costs for professional services to design and draft the plan document, which outlines the terms and provisions of the cash balance plan.
  2. Actuarial services: The employer may incur costs for actuarial services to determine the pay formula for the plan, which determines the employer’s contribution to each employee’s account balance.
  3. Legal fees: The employer may incur legal fees to review and approve the plan document and to ensure that the plan complies with all relevant laws and regulations.
  4. Investment management fees: The employer may incur investment management services to oversee the plan’s investments and ensure they perform as expected.
  5. Administration fees: The employer may incur fees for plan administration services, such as preparing and filing annual reports, responding to employee inquiries, and managing the plan’s investments.

Overall, the cost to set up a cash balance plan will depend on the specific needs and circumstances of the employer. It is important for employers to carefully review the costs associated with setting up a cash balance plan and to work with a qualified professional to determine the best course of action for their business.

Paul Sundin

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