FAQ

There are two main types of pension plans: defined benefit plans and defined contribution plans. Defined benefit plans offer a specific retirement benefit for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer towards the employee’s retirement account.

In a defined contribution plan, the actual retirement benefits provided to an employee depend on the amount of contributions made as well as the gains or losses of the account. A cash balance plan is a defined benefit plan that defines the benefit in terms similar to a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.

A cash balance plan is a retirement plan where the participant’s account is credited annually with a “pay credit” (such as 5% of their compensation from their employer) and an “interest credit” (either a fixed or variable rate linked to an index like the one-year treasury bill rate).

The value of the plan’s investments does not directly impact the benefit amounts promised to participants, meaning investment risks are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, they receive an account balance that defines the benefits.

For example, if a participant has an account balance of $100,000 when they turn 65, they would have the right to an annuity based on that balance. This annuity might be approximately $8,500 per year for life. However, many cash balance plans offer the option for a participant to choose a lump sum benefit instead (with consent from their spouse) equal to the $100,000 account balance.

If a participant receives a lump sum distribution, that distribution can generally be rolled over into an IRA or another employer’s plan if the plan accepts rollovers. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected within certain limitations by federal insurance provided through the Pension Benefit Guaranty Corporation.

A cash balance pension plan is a specific type of defined benefit plan structure. The plan is funded solely by the employer, and the participant contribution formula is defined in the plan document.

In a traditional defined benefit plan, the participant’s retirement benefit is expressed as a monthly annuity that is payable upon retirement. This can be confusing because the current value of the employee’s account or accrued benefit isn’t apparent.

The IRS technically calls a cash balance plan a defined benefit plan because there is a benefit formula clearly defined in the plan. However, it is generally considered a “hybrid” between a defined benefit plan and a defined contribution plan. This is because each employee’s benefit is essentially expressed as an account balance, somewhat like a 401(k) plan.

Each cash balance plan participant will receive both an annual interest credit and a pay credit. As such, a participant’s balance will increase each year by the amount of their pay credit and their interest credit. Both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life.

However, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement. In contrast, cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocated to the account.

Here are the key differences between cash balance plans and 401(k) plans:

1. Participation:

• Participation in cash balance plans does not depend on the worker contributing their own compensation, unlike 401(k) plans where participation requires employee contributions.

2. Investment Risks:

• In cash balance plans, the employer bears the investment risks as the plan’s investments are managed by the employer. In 401(k) plans, participants bear the investment risks and rewards based on their own investment choices.

3. Annuity Options:

• Cash balance plans are required to offer participants the ability to receive their benefits in the form of lifetime annuities, unlike 401(k) plans.

4. Federal Guarantee:

• The benefits promised by cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC), whereas 401(k) plans are not insured by the PBGC.

5. Contribution Limits:

• Cash balance plans do not have specified annual contribution limits like 401(k) plans, and can allow for much higher contributions up to around $300,000 per year.

6. Account Structure:

• Cash balance plans maintain “hypothetical accounts” for participants, whereas 401(k) plans have actual segregated accounts for each participant.

In summary, cash balance plans are defined benefit plans that provide a guaranteed retirement benefit, while 401(k) plans are defined contribution plans where the participant bears the investment risk. Cash balance plans also offer higher contribution limits and federal insurance that 401(k) plans do not.

In theory, the calculation for a cash balance plan depends on your business structure. For a sole proprietor, it is a complex calculation based on your business income. However, for an S-Corp or C-Corp, it is a much simpler calculation based on your W2.

As a corporation, you have more control over your contribution as you can adjust your compensation (assuming it is reasonable) to increase or decrease your contribution. Therefore, it is easier for us to determine your annual contribution under an S-Corp or C-Corp structure.

Ultimately, your business structure is a decision you should make with the help of your CPA.

Unfortunately, there is no Roth cash balance plan option. Remember that the business will get a tax deduction for any contribution, so the employee must pay tax at ordinary income rates when the funds are withdrawn.

There is no specific time period required for your retirement plan to be open, but the IRS considers these plans to be permanent. The agency assumes that the plans will operate indefinitely or at least for a few years, although it doesn’t define what “a few years” means.

In general, the IRS hasn’t questioned plan terminations that occur more than 10 years after inception, and employers that terminate a plan within 5-10 years usually don’t have problems. However, if you want to terminate your plan, you should make sure it’s a business necessity.

This would typically involve lower business profits, a change in ownership, or an issue that restricts funding the plan. The IRS has even accepted a company adopting a different retirement plan as a valid reason to terminate.

Many business owners want to set up plans for making large contributions, but they worry about the financial implications of including their employees in such plans. This is because the IRS requires non-discrimination testing for qualified plans.

As a result, if your employees are eligible and qualify, you will have to make a contribution for them. However, the goal is to minimize this contribution as much as possible. Usually, we can achieve this by excluding certain employees, such as those who are under the age of 21, those who work less than 1,000 hours a year, and those who were hired during the current year based on plan entry dates.

Ideally, after excluding the aforementioned employees and calculating the minimum contributions, at least 90% of the total contribution should go to the owner. The final contribution amount, however, depends on the employee mix within your organization.

If your employees are older and higher paid, then the contributions will be larger. Conversely, if your employees are younger and lower paid, then the contribution to them can be minimized.

Most plan administrators use a 5% rate in today’s market, which is considered a safe harbor rate. This rate is beneficial when cross-testing a plan with employees. However, you can use other rates like the 30-year treasury bond or actual return.

The actual rate of return can eliminate many of the over-funding or under-funding issues that create challenges. This rate is mostly used for larger plans with higher plan assets and many employees.

At the end of the day, using the 5% rate offers testing benefits and does not require the actuary to recalculate the rate each year. It also allows for larger contributions, as it will be higher than the 30-year treasury rate.

The primary reason for these plans is tax deferral, so small plans can allow larger contributions for the business owner. Moreover, the higher 5% rate creates a wider funding range, which helps employers fund at higher levels if they choose.

In summary, the 5% rate is used for smaller plans (under 20 employees) as it offers simplicity and better funding. However, for larger plans, you can consider other options that can limit plan over-funding and create consistent funding levels.

Your contributions to the plan will be determined by our actuary, and they will depend on your age and W2 income, or business profit if you are a sole proprietor. For each year after the plan is set up, you will typically be given a range of contribution amounts to choose from. You can decide how much you want to contribute and let us know.

If you choose to pay on the low end, it could result in a slightly higher range for the following years, and if you pay on the higher end, it could result in a slightly lower range. However, you have a lot of control over your W2, so you can adjust your contributions to fit your needs.

We will contact you in the fall to see how your year is going and what you anticipate your W2 to be. This way, we can plan accordingly before the year ends. If you have employees, we will examine their payroll and determine a contribution to be made on their behalf.

We can usually run an illustration in 1-2 business days. All we need is the following:

1. Owner age or birth date
2. Desired total retirement contribution
3. Business net profit
4. Number of full-time employees (if any)

If you have an employee census that details employee W2 compensation, birth date, hire date, termination date that would help.

In theory, social security promises you a monthly financial amount once you become eligible to receive it. Similarly, a cash balance plan involves the company making annual contributions to provide a regular monthly payment to an employee upon retirement.

However, in practice, cash balance plans for small businesses often do not work out as planned. At some point, the company may close down, get acquired, or terminate the plan for some other reason. In such cases, accumulated benefits are usually rolled over into an IRA.

Therefore, even though the plans are structured to function in a similar way, the distribution of funds usually differs in practice.

No, rental properties generate passive income which is not subject to employment taxes such as social security and Medicare. Therefore, in the eyes of the IRS, you are not considered truly self-employed. To qualify for a cash balance plan, you must either be self-employed or have a W2 from your business.

However, there are certain structures where rental properties can be managed by a management company. This management company may be able to pay you a wage to work for the business. If you have any questions about how to structure a plan with rentals, make sure to discuss it with us and your accountant.

Analyzing these plans can be a complex process, so I’ll try to simplify it for you. For most clients, the decision boils down to the following:

1. What is your tax bracket and how sensitive are you to taxes? If you’re in a 40% tax bracket, these plans make more sense than if you’re in a 20% tax bracket. Some clients will do almost anything for a tax deferral, so you’ll need to determine your own comfort level.
2. How much are you contributing annually, and how much of that contribution is being allocated to you versus your employees? If you’re contributing $100,000 or more annually and can get 85-90% allocated to you, it may make more sense to pursue these plans.
3. How comfortable are you committing to a plan for a few years? These plans are permanent in nature, but you can terminate them after a few years for reasonable cause. Terminating after a few years is usually not much of a problem, but you need to realize that these plans will require an annual contribution.

Cash balance plans and other cash balance plans may not be the best choice for everyone due to their complex economic structure. These plans are mainly driven by the individual’s compensation and age. Thus, if you have a higher W2 wage (or business profit) and are older, you can contribute more, and these plans make more sense.

Moreover, if you have employees, it can add to the complexity. The ideal situation is when there are older, high-income owners combined with younger, low-paid employees. However, when employees have high incomes, it can make things difficult because as a general rule, you may have to give the employee 10% or so.

The goal is to get between 85% to 90% to the owners. But when you have younger owners and higher-paid staff, the economics can shift. When it gets to a 70% owner and 30% staff ratio, it usually doesn’t make sense.

Also, when the owner is young, they often can’t get an allocation that is high enough when you consider the plan administration costs. These plans are more expensive because of the actuary cost to sign off. So when you assume that these plans will run $2k or so annually, that can also hurt the overall economics.

Therefore, in some situations, it may not make sense to use these plans. Instead, one can consider a safe harbor 401k or a SEP. I hope this helps you understand this matter more clearly.

Many large medical practices have physician partners with different financial goals. Some want to contribute to a 401k plan while others prefer a cash balance plan. A combined plan can be set up to accommodate both groups. The plan will have different funding amounts, and physicians can select the group they want to contribute to as long as it is compliant. The plan can also be structured to be covered by the PBGC, which allows physicians to max out their 401k contributions.

Here are some issues to consider when setting up the plan:

1. How to structure the plan to work for both contributing and non-contributing physicians.
2. How to make contributions to staff.
3. How to ensure the plan works with your tax structure.
4. Whether the plan is required to be covered by PBGC based on 25 participants or if you want to apply.

If some partners only want to contribute to the 401k plan, they can do so while the others can contribute to both the 401k and cash balance plan. The total eligible compensation is calculated, multiplied by 31%, and the 401k contributions are then subtracted from that amount to determine the remaining cash balance plan contributions.

To ensure the contributions are allocated correctly, you need to consider your tax structure. The goal is for partners to receive the tax deduction, and it is not allocated to other physicians, which can be easily done with a C-Corp.

To start, determine which physicians want to contribute and to what plan. For those who want to contribute to the cash balance plan, consider the approximate contribution level. Contributions will also need to be made for non-partner employees, but it may not be significant since they receive a large contribution through the 401k profit-sharing plan.

Many people are attracted to cash balance plans because of their substantial contributions, but it is important to carefully review the advantages and disadvantages before jumping in. Let’s take a closer look at the benefits of these plans.

Substantial Contributions
Cash balance plans allow for larger contributions than any other retirement structure, making them a popular choice for those looking to contribute $100,000 or more annually. Unlike 401(k) plans, cash balance plans do not establish annual contribution limits, as they are a type of defined benefit plan that aims to have a substantial, identified amount at retirement. Annual contributions can be as high as $300,000, subject to income, compensation, and age.

Funding Range & Flexibility
Contrary to popular belief, cash balance plan contributions are not fixed and can be structured as fixed or selected contributions. Most plans offer a flexible funding range that identifies a minimum, target, and maximum funding level. This range allows for more significant plan contributions in years with high taxable income and reduced contributions in down years. With each subsequent service year, the range widens, making it easy to get the funding contribution you need while keeping the plan compliant.

Combining Plan With a 401(k)
Cash balance plans can also be combined with a 401(k), which is called a combo plan. This combination allows for even higher overall retirement funding, but there is one restriction to keep in mind. Traditional 401(k) plans, along with profit sharing contributions, limit profit-sharing contributions to 25% of W2 compensation or 20% for a sole proprietor. While the employee deferral is still allowable based on annual limits, the business is limited to a 6% profit-sharing when combining a 401(k) plan with a cash balance plan. However, this limitation is generally not an issue since the cash balance plan contribution is so sizable that it makes up for the lower profit-sharing contribution.

The #1 Tax Strategy
Cash balance plans are qualified plans like 401(k) plans and other retirement deferrals, making contributions tax deductible. Upon retirement or plan termination, the investment funds can be rolled over into an IRA or 401(k) tax-free. While you can annuitize a plan, rolling over usually makes more sense. It is important to review your tax bracket with your CPA or tax advisor, as the higher your tax rate, the more cash balance plans will make sense. These plans are particularly popular with people living in high-tax states like New York and California.

Age-Weighted Contribution Levels
Cash balance plan contributions are age-weighted and compensation-based, meaning that older business people tend to benefit from them more than younger people. As we get older, our income typically increases, and we become more focused on retirement planning. Most cash balance plans are set up with a retirement age of 62, but because these plans aim for a specified retirement balance at 62, we can make larger contributions as we get closer to that age. This is why plan contributions are higher for 50-year-olds compared to 30-year-olds.

Take a look at some of the disadvantages.

Conservative Investment Options

Many people are aware that cash balance plans require conservative investments. Such plans usually have a stated interest rate credit of around 5%. It is essential to aim for investment returns that match this interest rate credit.

To offset lower cash balance investment returns, it is possible to invest 401k and IRA funds aggressively. It may be better to accept lower returns in the cash balance plan and opt for a safe retirement plan with steady contributions.

Higher investment returns will lead to lower future funding, while lower investment returns will result in high funding levels going forward. The aim is to limit volatility and enjoy consistent funding levels. This analysis is useful when considering the pros and cons of the cash balance plan.

I often advise clients who desire more speculative investments to do so in their IRAs or 401(k) plans. 401(k) plans establish a funding level upfront based on IRS-established limits. The investment returns do not affect plan funding once the funds are deposited into the plan account.

Higher Plan Fees

401(k) plans are relatively low-cost and are available for free from some investment providers or cost a few hundred dollars when a Form 5500 filing is required.

However, these plans are more expensive than traditional 401(k) plans. But, when you consider the large funding amounts, these plans are a home run.

We set up these plans for solo business owners for just $990 (plus participant fees). Annual administration costs will range from $2,000 to $2,500, so the plans have higher fee structures.

But with the average plan contribution of approximately $160,000 and marginal tax rates approaching 45% for many business owners, it only takes a little persuasion to justify the plan’s costs.

However, it would be best not to establish these plans if you want to contribute $20,000 to $35,000. Instead, stick with a 401(k) plan or a SEP, unless your income tax bracket is so high that you need all the tax deductions you can get.

Plan Permanency

These plans are permanent, meaning you can have them for a while.

The IRS requires the plans to be open for at least a few years, so it is best to set them up with a long-term intent.

Avoid starting and stopping the plans on a whim. Having the plans as an ongoing part of your company structure is best. If you have a plan open for just a few years and then decide to terminate it, you should not have an IRS issue as long as you had long-term intent and acted in good faith.

Many plans were terminated due to the COVID-19 pandemic. But remember that you can continue your plan even if your income is lower. Consider amending the plan to reduce the pay credit or changing the formula. You do have options if your business needs to be financially strong.

Non-Elective Contributions

One of the significant advantages of 401(k) plans is that they are elective. If you have a poor financial year, you can choose not to contribute. However, you have the option to fund a plan at the maximum in a good year. The contributions are elective and not mandatory.

However, cash balance plan contributions are more complex. Unless a plan is substantially overfunded, you must make annual contributions. Even though you have a funding range, you must make at least the minimum contribution or face an excise tax.

These mandatory contributions can be quite daunting. But, once you take a closer look, they usually are not that bad of a deal. Many people have excess funds in their bank accounts that were earned and taxed in previous years.

Moreover, remember that you can fund the plan up to the date you file your business tax return (including extensions). So even though your business profits could be down, you might have the cash next year to contribute. Thankfully, minimum funding usually is not a deal-breaker.

Complex to Administer

We all know that in life, you do not get something for nothing. These significant contributions come with a few administrative headaches. The plans are complex and must be carefully coordinated with your administrator, CPA, and financial advisor. Generally, most financial advisors and CPAs do not understand the plan structures.

Once you complete our online new plan set up form, it typically takes us 5-10 business days to draft all the plan documents. However, in some situations, we can set up a plan in as little as 48 hours depending on the time of year and plan design.

Most accountants and CPAs have a good understanding of qualified plans, but they may not be that familiar with cash balance plans. If you have a cash balance plan, there are some important things that your accountant needs to be aware of:

1) These plans are qualified plans and have an IRS approval letter. Therefore, you should share the plan documents with your accountant.

2) You have the ability to make the contribution up to the date you file your taxes (including extensions) and take a tax deduction on your prior year tax return.

3) Depending on your entity structure, your plan contributions can be reported in different places on your tax return.

We have completed an article that will show your CPA how to reflect your contributions on your tax return. See it here: https://emparion.com/deduct-cash-balance-plan-contributions-tax-return/ 

Setting up a Safe Harbor 401k plan involves a few steps:

1. First, inform your employees that you will match the first 4% they contribute. There may not be any contributions from them, allowing you to contribute up to the full deferral amount.
2. You need to decide on the custodian and the record-keeping for the assets. When employees contribute, you need to withhold the money from them and remit it to the plan. This requires coordination with your payroll provider. Usually, Voya is the preferred option as it can handle the process and offer investment options for employees. However, you can choose any other provider you want. Plan ahead, as it usually takes a month or so to get everything coordinated.

Our plan set up fees are all inclusive. There are no additional fees for actuarial services.

Other than our plan set up fees and annual administration costs, you might need to consider the following charges:

1) Bonding (if applicable)
2) Amendment fees. The IRS requires your plan to be amended and restated at least every 6 years. Our amendment fees are usually minimal. Our recent amendment fee was $400.

Rather than using a stated or fixed interest crediting rate like 5%, you have an option to use actual or market rate of return. But using a market rate of return has some important drawbacks.

If there is an investment loss or low return year, we would then use that as the projection rate under 401(a)(26) (minimum participation rule) and under 401(a)(4) (the rate group test). The lower the rate, the more upfront plan cost is required to pass these tests.

As an example, for a 26-year-old participant, a 1% year can require a following year contribution 372.84% higher as compared to a 5% cash balance plan rate. This can, in some situations, triple or quadruple the participant cost in order to keep benefits equivalent to pass the required testing. The main issue to consider is that similar funds go to staff through the combination of asset returns and plan contributions.

If the plan has cumulatively negative returns over time, the plan is required to provide a cumulative floor return of 0% over time. This is known as the “Preservation of Capital Rule”. As such, the company may have to contribute even more to the plan, whereas the participant does not share the full extent of any downside risk.

If the plan earns a 15% rate of return, all plan participants receive this full credit. As a result, the participants share this full windfall as opposed to the company using the surplus in the future. Compared to a 5% return plan design, the company could use this surplus to reduce future contributions.

As such, we normally only use the actual or market rate of return for plans that have a large number of owners/partners and few employee participants. For plans with one owner and only several employees it is typically not recommended and rarely used.

You could be eligible for a tax credit to offset some of your plan costs. Plans covered under this credit provision would be cash balance plans, other cash balance structures, and safe harbor 401(k)s. The credit is $250 for each qualifying employee under the plan. The minimum IRS credit is $500 and the maximum IRS credit is $5,000. The credit covers the plan set-up fees and annual administration costs. You can also take the credit in the first three years of the plan.

In addition, you may claim the tax credit in the year before the plan becomes effective if you want. It is claimed on Form 8881 that is required to be filed with your business tax return filing. You can find the form here: https://www.irs.gov/forms-pubs/about-form-8881 

The credit can apply in the following situations:

1) Your business has 100 or fewer employees who have at least $5,000 in compensation for the prior year;

2) Your business has at least one participant who was not considered a highly compensated employee (HCE); and

3) During the three years prior to the first year you claim the credit, your employees weren’t considered essentially the same employees who received retirement contributions under another company sponsored plan.

The unfortunate news is that solo plans will not qualify because they don’t have any qualifying employees/participants. The company owner is called a highly compensated employee (HCE) and is excluded.

Profit-sharing contributions to a 401K plan must be distributed among all participants in a nondiscriminatory way. One way to do this is by using the new comparability method of allocation.

New comparability is a popular method among business owners because it allows them to maximize their annual contribution to the IRS limit while still complying with regulations by making lower contributions to non-highly compensated participants.

To make the new comparability method work in favor of the owner, the average age of the owner(s) must be higher than the average age of other employees. The greater the age difference, the more the allocation will favor the owner.

Unlike other allocation methods, new comparability does not use set amounts for each participant. Instead, it separates participants into groups based on objective criteria and tests each group separately. Since these groups usually separate older and more highly compensated participants from younger and lower-paid ones, each group passes testing with more favorable contribution amounts.

In order to maintain qualified status, a 401(k) plan with profit sharing must pass multiple tests. If 5% of allocations are made to all non-highly compensated employees, this may be referring to the gateway test requirement. The requirement states that defined contribution plans must be designed to demonstrate that allocations are nondiscriminatory on a benefits basis, and each non-highly compensated employee that is eligible for a plan must receive at least 5% of their compensation in allocations.

However, making only 5% allocations to each employee is not always enough to pass other compliance testing, especially when owners are working to maximize their contributions.

All your plan documents are available in your SmartVault account. This is where we securely store copies of your plan documents and the annual administration reports for your access.

When a new plan is established, you will receive the following:

• Adoption Agreement
• Summary Plan Description
• Consent of Action
• Plan Document
• Participant Highlights
• Beneficiary Designation
• Plan EIN
• IRS Approval Letter

Terms Irrevocable or Revocable don’t really apply to your retirement plan. Those terms are typically used for personal trusts. Cash balance plans are tied to your business entity. These trusts have some similarities to both irrevocable and revocable trusts. But your plan is not actually labeled as either.

A cash balance plan must be set up by the time you file your business return (including extension) for the prior tax year. As an example, assume you have a calendar year-end, you can adopt a 2024 plan as late as September 15, 2025.

Realize also that the investment account must be established and funded by this date. So, you must coordinate with your plan administrator and custodian well in advance of the tax deadline.

Designating a beneficiary for a retirement plan may seem like a simple task, but it is actually a crucial financial decision for employees. This form designates who will receive the retirement funds in case the employee passes away.

The beneficiary can be any person or entity chosen by the owner of the retirement account or IRA. The form will typically ask for the name of the beneficiary(s), the amount each beneficiary would receive, and the relationship between the plan participant and the beneficiary. Typically, the forms will request the following:

• full name and address of the beneficiary(s);
• amount that each beneficiary would receive; and
• relationship between the plan participant and the beneficiary.

It may also ask for the beneficiary’s Social Security number or taxpayer-identification number, and in some cases, the form must be notarized. Retirement plan accounts, along with primary residences, are often the largest assets in a person’s estate. Therefore, it is essential to ensure that the beneficiary form is completed accurately.

It is important for retirement plan holders to complete their beneficiary form for their own benefit and the benefit of their family members. If an employee fails to make a beneficiary election, the plan document will specify a default beneficiary.

Usually, the surviving spouse is the default beneficiary, making it easy if the participant is married at death. However, if there is no surviving spouse, the plan document lists who is next in line to be the designated beneficiary. In such cases, it’s not uncommon for plans to have the deceased participant’s estate as the beneficiary of last resort when there is no election on file and no surviving spouse.

To ensure a prompt transfer of the retirement assets to the intended beneficiary, it is crucial to have a clearly established beneficiary designation. Every plan document has specific rules regarding the timing of benefit payments to beneficiaries. For qualified retirement plans, the company or plan sponsor is required to offer the beneficiary distribution of a deceased participant no later than the plan year following the year in which the employee died.

It is also important to note that estate planning documents, such as wills and pre-nuptial agreements, are subject to state laws, while retirement plan documents are subject to federal laws. Business owners with auto-enrolled employees should request their employees to complete the beneficiary form as part of the auto-enrollment process.

A beneficiary is a person or entity, designated by the plan participant to receive the plan’s eligible assets upon the participant’s death.

Typically, the participant’s spouse is the default beneficiary. A trust may be designated as a beneficiary but please note, when the assets pass to the trust, they are taxable in that same year. Unlike if the assets pass to a spouse or other person, there is a period of time before the assets become taxable.

If you choose Per Stirpes, it means that if a beneficiary dies before you, their share of the account will go to their living descendants, not other beneficiaries.

If the “Per Stirpes” box is not selected and a beneficiary passes away before the plan participant, that beneficiary’s interest in the account is forfeited and will pass instead to any remaining primary or secondary beneficiary, as applicable.

The plan is created to give all your accrued benefits to your spouse through a Qualified Preretirement Survivor Annuity (QPSA). Therefore, if the plan participant is choosing someone (or something) else, or in addition to their legal spouse, then the spouse must give written consent and have the beneficiary form notarized.

The form should be updated anytime the plan participant has a life-changing event and wants the beneficiary to be changed. Remember, the plan sponsor must follow the form unless the participant gains a spouse, then they are the primary beneficiary by default until written consent with notarization is given. It is a good idea to review the form often to ensure everything is in good order.

No. We are not investment advisors or financial planners. We are third party administrators (TPAs), and our job is to assist you with funding and provide compliance services.

You would likely be the trustee, and your job is to manage the plan assets. You might choose to hire a financial advisor, or you might select an online platform like Charles Schwab, Fidelity or Vanguard. Because our plans are IRS approved qualified plans, you may work with any financial advisor you like.

We cannot complete your Charles Schwab application for you. However, we have an article complete with detailed instructions on how to complete the application. You can see it here: https://emparion.com/setting-up-cash-balance-plan-at-charles-schwab/

We cannot complete your Fidelity application for you. But we have created a blog post that explains how to complete the application and lists everything you need to set up your investment account.

To view these instructions, use the following link: https://emparion.com/setting-up-a-cash-balance-plan-at-fidelity/

We cannot complete your Vanguard application for you. However, we have created an article with detailed instructions on how to complete the application.

To see the article, click the following link: https://emparion.com/how-to-set-up-your-defined-benefit-plan-account-with-vanguard/

We work with almost all custodians, and when you establish a plan with us, you will receive a trust document. This document is a tax-exempt retirement trust.

It is essential to ensure that your custodian or investment advisor uses the retirement trust document to set up the plan. If the investment account is not set up correctly, you may receive a 1099 form at the end of the year for interest, dividends, and capital gains in the account, which would be incorrect since these plans are only taxable when you withdraw money from the plan.

Furthermore, if the contribution is not made to a tax-exempt retirement trust, the IRS may consider the contribution invalid and impose taxes on the entire contribution. Therefore, it is essential to set it up correctly from the beginning.

At Emparion, we are plan administrators, not financial advisors. During the onboarding process, we will discuss your investment custodian application and account set-up process. We provide you with tips, articles, phone numbers, and any information we have to help you set up your investment account. However, it is ultimately your responsibility to set up the investment account correctly.

After completing your plan set up checklist, you have the option to have us set up the custodial investment account for an additional $400 fee. It might also be beneficial to have an investment advisor who can set up the account for you.

You must ensure that whatever custodian or investment advisor you use, they set the plan up using the retirement trust document. If the investment account is not set up correctly, you could receive a 1099 at the end of the year for interest, dividends and capital gains in the account. This would be incorrect because these plans are only taxable when you take the money out of the plan.

One advantage of a cash balance plan is that they can be funded up to the date the tax return is filed (including tax extensions). However, the latest date is September 15th. This allows you to claim a tax deduction on the prior year tax return filing.

Employers who offer a cash balance plan make contributions to a single “pooled” account, instead of opening individual accounts for each participant. This account is used to calculate the combined funding amounts for all employees, as opposed to maintaining separate accounts for each employee.

Unlike a 401k or an IRA, participants cannot view their account balance online. However, at Emparion, we track the individual account balances of each employee and provide participant statements, which include information about vesting and forfeitures. This ensures that all contributions are accurately allocated.

All participants in a cash balance plan must have complete ownership of their account balance after three years of participation, which is known as vesting. As a result, most plans are designed on a 3-year vesting schedule, which is also referred to as “cliff vesting”. This means that 100% of the account balance becomes fully vested at the 3-year mark.

Vesting refers to the point at which participants become the rightful owners of the contributions made to their plan. Until they have completed three years of service, they do not have ownership of these contributions. If a participant leaves before the third year of service, all contributions made to the plan will be forfeited and allocated towards reducing future contributions.

It’s important to note that if a plan is terminated, all participant accounts will become 100% vested.

Our administration fees include all plan actuarial services. As such, there is no need to hire an actuary seperately.

When we create a plan for you, we charge a fee to draft the plan document and provide consultations and customizations. However, cash balance plans also require annual maintenance. This is mainly because our actuary has to certify your contribution each year.

Every year, the following activities must be completed (which are covered by our fee):

• Annual consultations regarding funding issues
• Actuary sign-off and certification of final contribution amount
• Plan testing to ensure compliance with DOL & ERISA
• Preparing employer and employee benefit statements, including actuarial valuation reports
• Ensuring the plan complies with the IRS non-discrimination requirements
• Coordinating cross-testing with other plans along with non-discrimination testing
• Filing required tax returns.

Unfortunately, you need to perform all of the above-mentioned activities on an annual basis. We send out our annual administration invoices in April for the previous year’s compliance.

We need to know the deposit dates for two specific reasons:

1) the dates you make contributions factor into your actuarial calculations. This is because the interest crediting rate is applied as of each contribution date.

2) the IRS mandates the inclusion of deposit dates on form 5500, making this information a legal requirement for compliance.

As you can see, your contribution dates are essential to the compliance process. Remember that you can fund a plan up to the date you file your tax return, so contributions can be made in a given year that could apply to different years. As a result, the fewer contributions you have, the easier it is to track and reconcile contributions by year.

A leased employee is a person who is employed by a staffing firm but provides services to another company, referred to as the recipient company. The question is, which company should be responsible for providing a retirement plan to the leased employee? The recipient company is considered the common-law employer of the leased employee if the following conditions are met:

• The company that receives the worker is responsible for their employment status, including hiring and firing. 
• The worker is assigned to the recipient company for a long-term basis, and their services are provided under an agreement between the staffing firm and the recipient company. 
• The recipient company decides on the worker’s pay rate. The worker must have worked full-time for the recipient company for at least one year, which is equivalent to 1,500 hours of service in a year or a number of hours that is at least 75% of the average number of hours an employee in a similar position works. 
• The worker’s job is supervised and primarily performed under the direction of the recipient company.

If the employee is deemed under the control of the employer, then the employee will be included in the retirement plans.

Yes. You are able to include multiple companies within one plan. We still established the plan with your main operating entity and then can add on additional companies as needed.

But please realize that when you have multiple businesses, each company will need to make a contribution. You cannot make the contribution from either one. As a result, the contribution will be deducted on multiple different tax returns.

Schedule SB is a required attachment to Form 5500, which is filed annually by sponsors of single-employer defined benefit (DB) retirement plans. This schedule provides detailed actuarial and funding information about the plan, ensuring compliance with the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.

Schedule SB is completed by the plan’s actuary and includes data such as the plan’s funding target, the value of plan assets, the funding shortfall (if any), and contributions required and made during the year. This information is crucial for the IRS and Department of Labor (DOL) to assess the financial health and funding status of the plan.

The schedule requires specific calculations to determine the minimum funding requirements under the Pension Protection Act (PPA). Actuaries must report the plan’s funding target, which represents the present value of benefits accrued to date, and compare it with the plan’s assets to identify any shortfall. If a shortfall exists, the schedule outlines the amortization schedule for funding the gap over time. Additionally, Schedule SB details the funding method used, actuarial assumptions (such as interest rates and mortality tables), and any elections or relief measures applied during the year, like extended amortization periods or contributions under the CARES Act.

Filing Schedule SB accurately is critical for plan sponsors to avoid penalties and ensure transparency with regulators and plan participants. Errors or omissions can lead to compliance issues, increased scrutiny from the IRS, or even jeopardize the plan’s tax-qualified status.

Our solo 401(k) administration services include the following:

• Filing Form 5500
• Completing required plan restatements
• Guidance on funding amounts
• Profit-sharing calculations

If you are acquiring a business that already has a cash balance plan in place, you have a few options.

1. You may keep the existing plan in place and have the current third-party administrator (TPA) perform all the required administrative functions.
2. You may keep the existing plan in place and have Emparion take over or assume the plan administration.
3. You may terminate the plan and distribute the funds out to the participants. But before you do this, please ensure you understand the plan implications. You could be required to make a plan contribution and also all participants become fully vested upon termination. Before you terminate the plan, make sure you consult with your plan administrator.

The following is a list of documents we need to take over a cash balance plan:

• Plan Adoption Agreement (with any plan amendments)
• Summary Plan Description (if applicable)
• Actuarial Valuations for the prior two years
• IRS Favorable Determination Letter (if available)
• Form 5500 and any Attachments for the prior two years
• Year-end Statement of Plan Assets for the prior two years
• Current Employee Census
• Compensation History for ALL employees for the prior two years

We may require a few more documents, but this is a good start.

Defined balance plans are for employees. As such, if you have a corporation, you’ll must issue a W2 to contribute to a plan. You may not make a contribution to the plan if you are an investor and are not on payroll.

In general, you may still run payroll even when you are late by several months. But payroll taxes were required to be paid timely to avoid interest and penalties. For a calendar year payroll, the payroll taxes should have been submitted and paid within the first two weeks of January.

This being the case, you may still run a late payroll. But your penalties and interest will likely be more than 50% of the payroll taxes. In addition, any penalties paid are not tax deductible.

In many situations, running a payroll late does not make economic sense because the penalties usually exceed any tax benefits from the cash balance plan contribution.

Before you decide, please check with your CPA and payroll provider to determine what approach makes most sense. Establishing the plan for the following year might make the most sense.

Our annual administration invoices are sent out in April each year. This invoice is for the annual administration for the prior year. Here are a few timelines and penalty dates to consider:

1. Invoices are sent out in March/April for the prior year administration. As an example, you are billed in Spring 2026 for the 2025 plan year.
2. You have until June 1st to pay the invoice. Invoice reminders are emailed every two weeks. For example, if you were billed on March 15^th, you would receive a reminder on April 1^st, April 15^th and so on.
3. A late fee of $50 is charged for each month the invoice is open after June 1^st. For example, if you paid the invoice in June, you would have a total late fee assessment of $50, July would be $100, August would be $150 and so on.

Please note that payment must be received prior to July 31^st if you need us to file an extension for your Form 5500.

We bill set up fees upfront when we draft the plan documents. If you establish a plan during the calendar year for that same year, your annual administration invoice will be sent out in March/April of the subsequent year.

If you are establishing a plan for the previous calendar year, you are then billed upfront for both the set-up fee and annual administration fees.

Our annual administration services cover actuarial certification, IRS Form 5500 filings, plan consulting and any required reporting.

Unfortunately, no. But you do have until June 1st to pay without late fees. Our invoice and billing process does not allow clients to wait until their tax returns are filed. This is for the following reasons:

1. During the Spring (March through May), we start our internal client administration processing. This work includes updating your file, rolling forward the prior funding contributions, and initiating our internal review. As such, we begin working on your plan administration prior to your tax filing date.
2. Our actuary is required to spend time calculating your contribution and funding range. We must receive payment for services before this process begins. There must be plenty of time between receiving the payment, providing your contribution range, making your final contribution, and then filing any required tax returns.
3. Form 5500 (an IRS required form) must be filed prior to July 31st. While this deadline can be extended, we need to complete and submit the extension request.
4. Lastly, as you may be aware, these are “permanent” plans that are subject to mandatory funding rules and requirements. You are not allowed to “elect out” or change your mind in a given year. Administration is required each year.

We can make exceptions under certain situations like illness, overseas travel, family death, etc. Please let us know if you have any questions or concerns.

Yes, you can pay your plan administration expenses from your plan assets. However, most clients don’t want to do this because they want to take the tax deduction for our administration fees.

If you still want to do this, you can reach out to our billing department, and we will get you over our ACH and wire instructions to you can submit payment.

In year two of your plan, you will have more funding options available to you. You will be provided with a minimum and maximum contribution amount, as well as a targeted amount. If you have chosen to front-load your plan, you may see a reduction of 20% to 40% in year two.

However, if you have established a base contribution that aligns with your compensation, then in year two, your minimum contribution may be as low as 10%, and your maximum contribution may be up to 50% higher than your year one contribution. This means you will have some flexibility with regards to funding in year two, especially when it comes to increasing your contributions.

If you would like us to review your situation and provide recommendations, simply let us know. However, keep in mind that this will depend on the return on your assets, as well as your compensation or business profits if you are a sole proprietor.

Once you open your plan, you can start investing in it. However, the final amount of your annual contribution is determined at the end of the year based on your W2 or full year business profit.

If you have a rough estimate of your funding amount for the year based on projected numbers, it’s advisable not to make a full contribution. We recommend being conservative and contributing a smaller amount, say 75%. This way, you have some cushion in case the annual profit or W2 is lower than expected. You can make up the remaining 25% contribution on or before the tax return filing date, including extensions.

Sole proprietors are not paid a wage and are instead taxed on the net profits of their business. In order to determine their contribution, actuaries must first calculate a “deemed wage”. This calculation is complex and takes into account factors such as the proprietor’s age. Typically, the “deemed wage” is around 50-75% of the business profit, but there may be some variation within a contribution range.

Sole proprietors’ contribution calculations are more complex than those of S-Corps, especially when front-loading plans. For S-Corps, it’s usually easy to front-load plans by taking a W2 wage and contributing up to the 415 limit based on age, as well as adding a prior service adjustment and increasing it by 50%. However, sole proprietors face more challenges.

In the case of sole proprietors, contributions are based on a calculation that determines the “deemed” wage, which cannot be the entire profit. The maximum contribution is then determined based on age. Sole proprietors’ contributions are more restrictive because they can never go higher than the sole proprietor’s profit, less half of the self-employment tax. Prior service is required to make contributions higher than this “base” calculation.

It’s common to worry about future cash balance plan contribution amounts, especially when business income fluctuates. Let’s assume that this year you have a great income and want to invest a significant amount in a cash balance plan. However, you have concerns about next year as your income may go down due to factors such as a contract not renewing or you wanting to work fewer hours.

In such a situation, there are a few strategies to consider that can help solve the problem:

1. Adjust compensation: If your business is structured as an S-Corporation, your W2 compensation is a significant factor in determining the annual contribution amount. Thus, reducing your compensation can help lower the contribution amount. However, please note that you are still required to pay yourself reasonable compensation.
2. Fund low end of range: When an actuary calculates the required annual contributions, they consider certain assumptions and estimates. These items will typically provide a funding range. For example, your funding range may be $60k to $100k. This will allow you to fund more in good years and less in other years, providing you with some discretion.
3. Amend the plan: Lastly, you can always amend the plan to provide for lower contributions (subject to testing). However, once employees have met eligibility for the year (typically working 1,000 hours), you cannot amend the plan to lower the benefit amount.

A cash balance plan is a retirement savings plan that doesn’t have a fixed annual contribution limit like a 401(k). The goal of this plan is to accumulate a specific amount of money by the time an individual retires, usually at the age of 62.

As the participant nears retirement, they can contribute as much as $300,000, depending on their income level. It’s important to note that the annual target contribution amount will vary each year, and the plan will provide a range for the contribution amount.

For instance, while your target contribution may be $150,000, the low-end range could be $75,000, and the high-end range could be $400,000. This provides some flexibility each year.

We have a post here that details it: https://emparion.com/cash-balance-plan-lifetime-contribution-limits/

Probably not. If you have many, high income and older employees you will likely not be able to structure the cash balance plan to maximize high funding for the owner. You may include certain groups in the plan, and this can also help benefit certain employees. But these plans often don’t work as well for business owners with over 10 employees unless the owner is looking for an employee benefit.

The funding range provided to you indicates the minimum and maximum amount you can contribute. Ideally, it is recommended to target a funding level that lies somewhere in the middle of this range. This provides flexibility to contribute more during a financially stable year and less during a lean year.

However, it is essential to exercise caution while choosing your funding amount. Consistently funding at the lower end of the range may result in future minimums increasing, pushing funding amounts higher. On the other hand, consistently funding at the higher end of the range may limit future funding amounts, and maximum contributions may start to decrease.

This is a common issue that can be resolved quickly. The first step is to determine the excess contribution and any earnings on it. Second, contact your custodian immediately and inform them of the error. They will provide you with a form to remove the excess contributions and any earnings.

The custodian may report the distribution on Form 1099-R along with any earnings that you made. The distribution is not taxable, but the earnings are. It is important to note that you should NOT take a tax deduction for the excess contribution.

In general, your contributions are not fixed. They will go up or down each year depending on a variety of factors. If your business profit (or W2) is higher next year they will go up, and if your business profit (or W2) goes down then your contributions will generally go down.

But here is a critical point to consider. Even though your target contributions will vary each year, you will be given a funding range. As an example, your recommended contribution might be $75,000, but you could have a minimum contribution of $50,000 and a maximum of $100,000. This gives you some flexibility each year.

You can structure retirement plans to account for prior years of service. Essentially, you can use compensation from previous years to make a larger credit in the current year.

In the year of setting up the plan, you can make a one-time opening credit for past services, similar to a “catch-up” contribution. This contribution is tax-deductible in the current year, and you don’t need to amend prior tax returns.

This strategy allows business owners to make maximum contributions that exceed the targeted contribution for that year. You can get a tax deduction in a year when your income is high.

However, you need to be cautious, as prior service applies to all eligible employees who have worked for the company. You may have to contribute for employees who no longer work for the company.

To begin with, there are two components to a 401(k) contribution: the employee deferral and the profit-sharing contribution.

If you have non-owner employees, the employee deferral must be elected by the end of the year and deposited into the employee’s retirement account within 7 business days and no later than 15 days. For owner/employees, the deferrals must be elected by the end of the year, but can be contributed by the tax filing deadline (including extensions).

However, there are some things to consider for owner/employees. Solo 401k is a non-ERISA plan, which means it is not subject to the Department of Labor rules. This plan is designed for owner-only businesses with no qualifying or eligible employees. For an S-Corp or C-Corp, the election is reflected on the W2 in box 12A, Code D.

Regarding the profit-sharing contribution, it is clear that it is due before the tax return is filed (including extensions).

These retirement plan contributions are primarily based on your age and W2 income. The older you are and the higher your W2 income, the more you can contribute. In the first year, you have more flexibility and can front-load the plan. However, this can have an impact on your future contributions.

If you want to maintain a similar contribution level in the upcoming years, you may want to consider increasing your W2 income this year. If you don’t, your future contributions might be slightly lower.

If you had a good year and are looking for a tax deduction, and you anticipate lower income next year, then you may be fine with maintaining your current contribution level.

If you want to contribute more in the future, you will most likely need to increase your W2 income next year.

If you just want to focus on this year’s contributions, that’s also fine. Just make sure to discuss this matter with your CPA.

In summary, if you want to maintain a similar contribution level in the future, you may want to consider increasing your W2 income this year. However, if you are comfortable with the potential outcomes mentioned above, then you don’t need to make any changes.

Cash balance plans are considered permanent by the IRS, but the “5-year commitment” is a recommendation made by third-party administrators to estimate the average lifespan of a plan. However, cash balance plans can be terminated at any time with reasonable cause.

Most clients tend to keep their cash balance plans open for an average of 5-7 years, but some terminate earlier or keep them open for longer periods. Several factors, including mortality tables, IRS limitations, compensation, and investment performance, influence the calculation of cash balance contributions, making it challenging to project the exact amounts for the next 5 years.

Assuming that everything remains the same, the funding target increases by about 5% annually. The calculation of the funding range each year is based on age, compensation, and investment performance.

Age is a significant factor since participants get closer to retirement each year, increasing the amount that can be put in. Compensation establishes a base for the amount that can be put into the plan. If compensation decreases, this would shift the funding range to a lower minimum and maximum. If it increases, it would increase the minimum and maximum.

Investments also play a crucial role. If investments under-perform, contributions will have to offset some of the loss, and if they perform well, it will limit the maximum funding.

To keep funding ranges level, we suggest investing cash balance plan funds conservatively and with less risk. We also provide a target funding amount that keeps contributions on target with the year’s funding.

If the funding amount is in line with the target each year, it will maintain a flexible funding range for future years. This allows some discretion to contribute more in a good financial year and less in a lean year. After a few years of funding at the target, the funding range expands until the minimum is $0 and the maximum is the IRS limit.

However, if the funding consistently falls at the low end of the range, future minimums will increase, pushing up funding amounts. Similarly, if plans are consistently funded at the high end of the range, the maximum contributions will decrease, limiting future funding amounts.

Annual contribution amounts are determined based on various criteria including your age, W2 compensation (or business income) and investment returns. If you are looking to make higher contributions, you should consider the following:

1. Increase your wage. If you do not have employees, then typically you can get your W2 up to $275,000. That is generally the highest applicable compensation. If you have employees, then you should consider increasing your W2 up to $345,000.
2. Consider adding your spouse. If your spouse works for your company, then you should consider including them on payroll or possibly increasing their current W2 compensation. This could allow them to get a cash balance plan contribution and potentially make a 401(k) deferral and profit-sharing contribution as well.
3. Review your investment mix. Please note that these plans use an assumed interest rate of around 5%. If your assets earn more than this rate, it will push your contributions lower. Ensure that any aggressive and volatile investments are made in your 401(k) plans and any IRAs.

Remember that these plans are just one part of your tax and retirement strategy. Make sure you review the items noted above with your CPA and financial advisor.

As a general rule, we recommend clients don’t pre-fund their defined benefit plan account. So, you would technically wait until we give you final numbers early next year.

The reason behind this is that we have no idea today what your investment returns will be, what your compensation will be, what IRS updates will be in place and what your desired final contribution will be. Essentially, we don’t have a crystal ball and there are too many unknowns.

In addition, there is always the potential that your income will go down later in the year or possibly go away (probably unlikely though). If you funded an amount this year, you might not be eligible to make that contribution and then you’d be stuck taking the money back out.

Again, there are too many variables, so we recommend you don’t make any interim contributions. But if you wanted to contribute a small amount you’d likely be fine. But that’s a risk you’d have to decide if you want to take.

I think your CPA might be confusing the benefit limit with the annual contribution amount. My guess is he sees the IRS annual benefit limit of $275,000 and is equating that to a contribution amount. The benefit limit and the annual funding are two separate issues.

Here is what the IRS says:

In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:

1. 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or
2. $275,000 for 2024 ($265,000 for 2023; $245,000 for 2022; $230,000 for 2021 and 2020; $225,000 for 2019)

You can find this in this link here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits

So, the $275,000 represents the annual benefit payments from retirement age until the date of mortality, which is around 80 years old. If you present value this payment stream, you’ll get to the amount of $3.5 million at retirement, which is the maximum level that you can have in a plan at retirement for 2024. The IRS is just saying that you can’t have more that this in the plan for the participant.

The $275,000 just relates to the maximum amount you can have in the plan, but it has nothing to do with your annual contributions. You could make contributions in many situations that are higher or lower than this. But the final payout can’t exceed $3.5 million.

I think your CPA might be confusing the benefit limit with the annual contribution amount. My guess is he sees the IRS annual benefit limit of $275,000 and is equating that to a contribution amount. The benefit limit and the annual funding are two separate issues.

Here is what the IRS says:

In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:

1. 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or
2. $275,000 for 2024 ($265,000 for 2023; $245,000 for 2022; $230,000 for 2021 and 2020; $225,000 for 2019)

You can find this in this link here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits

So the $275,000 represents the annual benefit payments from retirement age until the date of mortality, which is around 80 years old. If you present value this payment stream you’ll get to the amount of $3.5 million at retirement, which is the maximum level that you can have in a plan at retirement for 2024. The IRS is just saying that you can’t have more that this in the plan for the participant.

The $275,000 just relates to the maximum amount you can have in the plan, but it has nothing to do with your annual contributions. You could make contributions in many situations that are higher or lower than this. But the final payout can’t exceed $3.5 million.

If you believe that your income will be higher in the current year but will decrease in the future year, it certainly may make sense to fund a higher amount this year.

First of all, with the higher income, you’ll be in a higher tax bracket. So, the funding will save you more tax this year. You may want to consider funding over the targeted amount. This excess or overfunded amount will roll into the subsequent year and likely make it so that you would have a much lower funding level or likely not have to fund in a down year.

Bottom line, in this situation, it does make sense to likely over the current year. 

As a general rule, we recommend clients don’t pre-fund accounts. So, you would technically wait until we give you final numbers early next year.

The reason behind this is that we have no idea today what your investment returns will be, what your compensation will be, what IRS updates will be in place and what your desired final contribution will be. Essentially, we don’t have a crystal ball and there are too many unknowns.

In addition, there is always the potential that your income for next year will go down later or possibly go away (probably unlikely though). If you funded an amount this year, you might not be eligible to make that contribution and then you’d be stuck taking the money back out.

Again, there are too many variables, so we recommend you don’t make any interim contributions. But if you wanted to you could probably contribute a small amount and you’d likely be fine. But that’s a risk you’d have to decide if you want to take.

Obviously we want them to fund before the tax filing or before 9/15. But we could include effects of during calendar year vs subsequent year and how waiting until 9/15 can have an impact as well.

You have technically 8 1/2 months after your plan year end to fund your plan. But funding also needs to occur before you file your tax return for the given year.

From a compliance standpoint, it does not matter when you file your funds, your plan as long as you get it done by this deadline. However, when you fund the plan early in the year, investment gains and losses will start to accrue, and the actuaries will also begin to assign an interest credit at that earlier date. What this means is that if you find early, it can push your plan to be slightly more overfunded because of the early investment accrual.

Unfortunately, no. Rental real estate is defined as a “passive activity” and there is no employment taxes (Social Security and Medicare) assessed on any profit. As a result, you are not actually an employee and are not allowed to contribute to company sponsored employee retirement plans.

The big advantage of having rental real estate is that there is no Social Security or Medicare assessed on profits> But as you can see, it prohibits you from using the profits to contribute to retirement plans.

Adding a spouse to the plan can be beneficial as it allows the owner to max out their overall retirement contributions since the spouse is able to take advantage of the $30,500 (for 2024) employee deferral in the 401k.

In addition, the amount on the spouse’s W2 reduces the overall business profit and allows them to receive a contribution to the cash balance plan.

Depending on the specific situation, there may be a need to add the spouse for immediate entry to the plan, but it could potentially include additional employees as well.

There is an additional fee for adding a spouse but when you compare the ability to maximize contributions, it typically makes sense.

Yes. You can compare the investment balance on the Form 5500 to the actuarial benefit in the year end valuation reports. This is explained in the following article: https://www.emparion.com/easy-way-to-know-defined-benefit-plan-is-overfunded/

If you are a sole proprietor, you must file Schedule C with your Form 1040 personal tax return. You will not file a separate tax return, only an add’l schedule to be included with the return. Your net business profit is reported on line 31 of your Schedule C.

When you are an S-Corp or C-Corp, your net business profit is determined after deducting your W2 wage. For example, if your S-Corp has a profit of $300,000 before your wage of $100,000, then your business net profit would be $200,000.

Absolutely! It is very common and allowed by the IRS to have a one-person owner-only plan. However, you must have income that is subject to employment taxes, which can be profits on a Schedule C for a sole proprietor or a W2 wage for a person with a C-Corp or S-Corp.

Please note that there is no age restriction or limitation, meaning you can be 20 years old or 80 years old! However, the older you are, the higher the contribution amount you will be able to make.

Many people know that it’s possible to combine 401(k) plans with cash balance plans and defined benefit plans. However, there are IRS limitations when it comes to the 401k profit sharing contribution percentage. It goes from 25% down to 6% when combined with these other plans.

Questions often arise regarding how the 6% is calculated. If you have a W-2, you can calculate the gross compensation (subject to the annual limit) and apply it at the 6% rate. But for sole proprietors, who do not issue a W-2, it can be challenging. The deemed wage amount needs to be determined to calculate the proper funding level.

To calculate profit sharing for a sole proprietor, the following algebraic equation needs to be used:

Business net profit ≥ 1/2 of self-employment tax + cash balance plan or defined benefit plan contribution + 401(k) profit sharing contribution + deemed wage (as calculated by the TPA)

In other words, the sum of these four components cannot exceed the net income. This can be complex for an average person to calculate.

To illustrate, let’s assume we have a client with the following assumptions:

What we need to do next is to calculate the “deemed wage” and then multiply that by 6% to derive the profit-sharing contribution.

It is critical to note, that the larger the cash balance plan contribution, the lower the “deemed wage” and the lower the profit-sharing contribution.

Here is the calculation:

S corporations (S corps) are considered pass-through entities by the IRS. This means that any deductions, losses, income, credits, and profits pass through directly to shareholders. These shareholders then report their share of the business’s performance on their personal tax returns. The tax rate on S corp profits that an owner/shareholder pays is determined by their individual income-tax rate. This rate can be anywhere from 10% to 37%, depending on the filer’s total taxable income.

The S corp business structure has a significant tax advantage because it avoids double-taxation. C corps have to pay taxes at the federal level, but S corps do not. Instead, S corp profits are only taxed once on the personal tax returns of individual shareholders. However, it’s important to note that shareholders who incur out-of-pocket expenses related to the business can’t deduct them on their tax returns. They must instead submit an expense claim form to the S corp, which will pay them back.

A C Corporation is a tax classification for corporations formed under state law. By default, they are taxed as C Corps, meaning that they will be treated as a C Corporation unless they choose another tax classification, such as S Corporation status.

Many small business owners are usually concerned about double taxation. C Corporations are generally subject to double taxation, which means that the corporation pays income tax on its net profit, and then shareholders are taxed when those profits are paid to them as dividends. This results in the money being taxed twice.

C Corporations pay a flat 21% tax at the entity level, which is different from the tax other businesses pay. Other entity types, such as sole proprietorships and partnerships, pay tax based on the owners’ individual income tax rate. The individual rate is usually progressive, increasing as the owner’s income increases.

To calculate the income subject to the flat corporate rate, corporations must complete and file Form 1120. The due date for Form 1120 depends on whether the corporation follows a fiscal year or calendar year. Many C Corp businesses choose to be calendar-year corporations, with the due date for Form 1120 being April 15th, the same due date for most individual tax returns.

These plans are for people who are employees. As a result, any person working in the business must have payroll tax withholdings for Social Security and Medicare.

Whether or not you are required to be on payroll depends mostly on your entity structure. If you are an S-Corp or C-Corp, you must be on payroll and generate a W-2.

But if you are taxed as a sole proprietor, you should not be on payroll. Your entire business profit is subject to Social Security and Medicare taxes. This business profit is what the actuary will need to calculate your contribution amounts.

In addition, if you are taxed as a partnership and you work in the business, any allocated partnership income would typically be subject to self-employment taxes, and you should not run payroll or issue a W-2.

At the end of the day, running payroll depends largely on your entity structure. If you have any remaining questions, feel free to contact us and we can clarify.

No. Only the W2 compensation is used to calculate the contributions.

Partnership taxation works differently from other business structures. In a partnership, the business doesn’t pay taxes directly to the IRS. Instead, it’s a pass-through entity, which means that the profits and losses are distributed among the individual partners. Each partner then reports their share of the business income on their individual income tax returns.

Even though a partnership doesn’t pay taxes on its profits, it still must declare its operating losses and profits to the IRS in Form 1065 for tax filing. Every partner receives a Schedule K-1 form that shows their portion of the partnership’s income or losses. This method is different from corporations that pay corporate income tax on their profits.

It’s important to estimate the tax amount you owe before you receive your Schedule K-1. This will help ensure that you set aside enough money to pay your taxes. Key elements like income tax rate, personal liability, and disclosures are crucial in partnerships.

Unlike a sole proprietorship or LLC, where the owner faces personal liability, general partners in a partnership can be held responsible for the business’s debts. However, limited partners in a limited partnership have protection similar to an LLC. These structures allow owners to safeguard their personal assets.

Where you deduct cash balance plan contributions on your tax return depends largely on your entity structure. The following are the common entity structures:

1) Sole proprietor or single member LLC (Schedule C to Form 1040)

2) Partnership (Form 1065)

3) S-Corporation (Form 1120-S)

4) C-Corporation (Form 1120)

We have written a post on this topic here: https://emparion.com/deduct-cash-balance-plan-contributions-tax-return/

You generally would deduct the cash balance plan contributions in the year in which you make them. But you may apply them to the prior year if all the following requirements are met.

1. You make the contribution by the due date of your tax return for the prior year (plus extensions).
2. You accrue them at the end of the year on the tax return.
3. The plan treats the contributions as though it had received them on the last day of the previous year.
4. You do either of the following.
   1. You specify in writing to the plan administrator (or the trustee) that the plan contributions will apply to the prior year.
   2. You deduct the contributions on your tax return for the prior year. A partnership shows contributions for partners on Form 1065 and an S-Corp shows them on form 1120-S.

Defined balance plans are for employees. As such, if you have a corporation, you’ll must issue a W2 to contribute to a plan. You may not make a contribution to the plan if you are an investor and are not on payroll.

In general, you may still run payroll even when you are late by several months. But payroll taxes were required to be paid timely to avoid interest and penalties. For a calendar year payroll, the payroll taxes should have been submitted and paid within the first two weeks of January.

This being the case, you may still run a late payroll. But your penalties and interest will likely be more than 50% of the payroll taxes. In addition, any penalties paid are not tax deductible.

In many situations, running a payroll late does not make economic sense because the penalties usually exceed any tax benefits from the cash balance plan contribution.

Before you decide, please check with your CPA and payroll provider to determine what approach makes most sense. Establishing the plan for the following year might make the most sense.

Remember that these plans are only for actual employees. Said differently, they are for people who have earned income that is subject to Social Security and Medicare taxes. So, you must generate a W-2 for your spouse if you want to make a contribution for them. There are also restrictions on entry dates, but we can typically amend the plan to add the spouse in year one.

Please note that your spouse has to actually work in the business, and the salary needs to be reasonable based on the services performed. So, ensure you review the payroll with your CPA or tax preparer. But if you’re goal is to get higher overall plan contributions to lower your tax liability, making a contribution for your spouse can certainly make sense.

“Reasonable compensation” is a term used by the IRS that is not directly related to compliance with cash balance plans. Some business owners of S-Corps may choose to pay themselves a low wage to save on employment taxes, but the IRS requires that S-Corp shareholders receive a reasonable compensation for their work. This means that they should be paid what they would need to pay someone else to do their job if they stopped working for a year. It is a subjective issue.

Most S-Corp owners prefer to keep their compensation low, but this may not be the best strategy if they want to make higher contributions to their cash balance plans. Contributions to these plans are mainly based on age and compensation, so a higher wage may result in a higher contribution.

While reasonable compensation is not directly tied to cash balance plan compliance, it is important to consider funding levels when discussing a reasonable wage with your CPA.

Form W2 is a document that shows the total wage or earned income that your company paid you during the year. It also provides a summary of the employee payroll taxes, as well as federal and state tax withholdings.

If your administrator requires a W2 number, please note that many people assume that their earned income for the year is reported in box 1. However, this is not always the case. To report your earned income, you should refer to the number in box 5, as it takes into account income exceeding the social security tax cap (which is capped each year).

It is important to note that box 1 is reduced by any 401(k) deferral, which means that it is not an actual reduction of the earned income paid to the employee. This deferral is an employee designated salary deferral.

Please refer to the W2 graphic below for further clarification.

A 401(k) deferral should be shown in Box 12a, code D of the Form W-2.

Any profit-sharing contributions are NOT reflected on the W-2. They are deducted on the business tax return.

Ensure that the box 13 on the W-2 stating “Retirement Plan” should be checked.

Unfortunately, not. In most situations, you will have no mandatory contribution if you have no sole proprietor business profit. However, this isn’t always the case, depending on prior compensation and investment returns.

If you have no business profit and you make a mandatory contribution, that contribution will not be tax deductible and should not be included on your tax return. Deductible contributions are limited to net income, less one-half of self-employment taxes. 

While it’s not a scenario we encounter frequently, it can indeed raise some tax concerns. However, we can work together to ensure that your plan funding is adequate and that the plan aligns with your future goals. 

Remember that retirement plans are for employees. So you must be an employee on form W2 to participate in a plan. Unfortunately, if you did not issue yourself a W-2, you have a few options to consider:

1) You should talk to your CPA or payroll provider to see if it makes sense for you to issue a late W-2. There will be penalties and interest, but this is an option.

2) If you were considering setting up a plan, it might make sense to skip the plan for the current year. If you already have a plan in place, you can often still fund it, given the funding range and prior compensation. However, without a W-2 for the current year, the contribution would likely be on the low side.

3) In some scenarios, income can be nominated over to you as a sole proprietor. This approach, if applicable to your situation, could allow you to still contribute to a plan for the current year. Reviewing this in detail with your CPA and tax professional is essential.

While contributions to a define benefit plan are tax deductible at the federal level, they may not be deductible at the state level. Each state has their own tax code and there is no guarantee that your state allows the tax deduction.

The good news is that most states will allow the tax deduction. However, you will want to check with your CPA to verify deductibility.

Opening a bank account for a retirement plan can be a confusing process for many banks, both large and small. To make the process easier, here are some tips to keep in mind:

• Make sure to bring a copy of the EIN provided when the plan documents were set up for your retirement plan. This EIN will be used to open your bank account. Avoid using your social security number or the EIN for your company.
• In most cases, the banker will not need to see the actual plan document. However, if you want to be safe, you can print off the Adoption Agreement and bring it to the bank. Note that this is a lengthy document of around 30 pages. Any documents they request should have already been provided when the plan setup was completed.
• Make it clear to the banker that you want to open a “Trust” bank account and not a business or personal bank account. Often, bankers assume that you are seeking to open a solo 401(k) with the bank as the trustee. However, this is not the case, as you will be the trustee for the plan.
• You may need to explain that a self-directed 401(k) falls under the Internal Revenue Code and falls under the retirement trust umbrella. As the business owner, you can serve as the trustee of the trust, directing all investments and deciding on the bank or credit union where the trust liquid funds will be held. Therefore, the bank will not serve as the trustee of any of the alternative investments (e.g., real estate, precious metals, tax liens, notes, private shares, etc.) and will not administer the plan.
• If there is still confusion, you can recite the following:

Trusts and trustees. Understand that 401(k) plans will be funded through a trust established to hold plan assets. At least one trustee must be appointed to have responsibility for the trust activities and to invest assets. This is a critical responsibility with the potential for liability. Trustees normally include the business owner, a trusted employee, or a financial or trust institution.

Other Common Questions You Might Encounter:

Question. How should the account be titled?

Answer: The bank account is titled in the name of the plan trust.

Question: Who is the trustee?

Answer: You, as the business owner, would normally be the trustee.

Question: Who has signing authority on the account?

Answer: You (the trustee) has signing authority.

Question: What banking features are allowed for the plan bank account?

Answer: Check writing, ACH, debit cards, wires and cashier checks should be permitted. However, credit cards and lines of credit are not.

As third-party administrators, we do not act as custodians or investment advisors. Our clients usually have a financial advisor and use our paperwork to open an account with them. However, you can also set up your own online brokerage account and fund it that way.

You have the freedom to invest in anything you like. The common investment options include stocks, bonds, mutual funds, CDs, and more. You can also invest in real estate, but it’s important to ensure that you can provide our actuary with a fair market value of all assets by the end of the year. This is essential for us to keep an accurate record of the assets in the plan.

When it comes to investing your funds, you have the freedom to invest in any asset that you prefer, such as stocks, bonds, mutual funds, CDs, or even real estate. However, if you choose to invest in real estate, it is important to provide our actuary with the fair market value of all assets in the plan at the end of the year. This is necessary for us to accurately perform our calculations.

Yes, you are allowed to have multiple investment accounts. As long as you set up each account under the trust with the provided EIN, you should be fine. Our actuary needs the balance in each investment account at year-end in order to determine funding levels and to test compliance.

As a plan sponsor and trustee, you have the authority to invest the funds in a variety of options, subject to certain restrictions. Although most people invest in the stock market, it is not mandatory for you to do so.

The goal of the plan is to accumulate a specific amount of money by the time employees retire, and larger investment returns mean that the company does not have to contribute as much to reach that target. However, if the stock market goes down significantly, the company may need to make larger contributions to make up for the loss.

To minimize funding volatility, the plan aims to achieve slow and steady returns. If you prefer to make more speculative investments, it may be better to consider doing so in a defined contribution plan, such as a 401k.

Additionally, the amount you are expected to contribute will vary depending on several factors, including investment returns.The goal is to have slow and steady returns to minimize funding volatility. So if you plan on making more speculative investments, you may want to consider doing this in a defined contribution plan like a 401k.

It is also important to note that you are given a range to contribute each year and this will fluctuate based on a variety of criteria one of which being investment returns.

As you are aware, we at Emparion cannot provide you with financial advice. However, it is important that you understand how the interest crediting rate works.

Your plan comes with a fixed interest rate of 5%. This means that the plan assets assume a return of 5%, and our actuary will model contribution levels based on this rate. Therefore, the plan’s goal is to generally match this rate.

We understand that most of our clients prefer consistent annual contributions to lower taxable income. Hence, they want to ensure that plan assets are invested conservatively.

Large investment gains and losses result in funding volatility, which can lead to significant fluctuations in annual required contributions. If your gains exceed the 5% rate, your future contributions will decrease. Conversely, if your investment gains are less than 5%, it will increase your future contributions.

Therefore, we recommend that you adopt a conservative investment approach. We do not recommend investing 100% in stocks. If you want more exposure to the stock market, you may consider increasing stock allocation in IRAs, 401ks and other defined contribution structures.

You have the ability to manage your plan assets. However, if you are uncomfortable managing these investments, we suggest that you consider consulting a financial advisor who is familiar with these plans.

As such, we would recommend that you use a conservative investment approach. An investment allocated 100% to stocks is not recommended. If you desire more stock market exposure, please consider increasing stock allocation in IRAs, 401ks and other defined contribution structures.

You are able to manage your own plan assets. However, if you are uncomfortable managing these investments, you should consider using a financial advisor that is familiar with these plans.

Here is YouTube video that addresses the topic:

It’s important to note that due to the significant investment gains, you may not be able to fund the plan for the next few years. Cash balance plans are typically conservatively invested, with an assumed investment return of around 5%. While it may not be possible to achieve an exact 5% return, generally any return between 0% and 10% should not have a significant impact on your funding.

With a cash balance plan, you can invest in various asset classes such as real estate and stocks, but it’s important to be cautious in doing so. Historically, the S&P 500 has earned about 11% annually, but returns can vary greatly from year to year. Because the actuary must use a 5% interest rate each year-end, large increases in asset returns will reduce contributions, while significant losses will increase them.

For instance, if you invested $200,000 in a single stock, and it became worthless, you would then need to make a contribution in the following year that could be nearly double what you initially intended. While this is possible if you have the funds, most people prefer consistent contributions for substantial tax deductions.

Therefore, it’s advisable to limit stocks and aggressive mutual funds in a cash balance plan. Instead, most clients invest in CDs, money market accounts, and other conservative investments. Volatile and aggressive investments should be in a defined contribution plan (401k) or an IRA. However, it’s best to discuss this issue with your financial advisor, as we are not investment advisors.

In summary, it’s unlikely that you’ll be able to fund the cash balance plan for the next few years, and you may want to review your W2 compensation to potentially increase your benefit.

We discuss this issue extensively on our webinars, so I encourage you to attend in the future. Also, here is a video that addresses the topic: https://www.youtube.com/watch?v=CLGAe_hWlz0&t=165s

Yes. However, in most situations we try to dissuade clients.

Most people will invest plan assets in stocks, bonds and mutual funds. These are called “qualifying assets” and you would normally establish an investment account at Schwab, Fidelity and Vanguard to accomplish this.

But you do have the option to invest in other “non-qualified” investments. This includes real estate, gold and other precious metals, hard money loans and notes, bitcoin/other cryptocurrencies. You can also invest in unique structures like partnership units and private placements. So, there are plenty of options to consider.

However, when you invest in “non-qualified” assets there are many more compliance issues. This includes a more complex 5500, valuation concerns and required bonding. As such, we recommend clients first consider these types of investments in an IRA or 401(k) where there are fewer compliance issues.

If you are looking to do self-direction, you must follow these steps:

• Make sure it is allowed in your plan document;
• Purchase a bond for the plan;
• Set up a bank account to allow for the deposit and disposition of funds; and
• Track investments and perform year-end valuations.

Yes, we do. There is an additional $500 annual administration charge for the extra compliance services associated with self-directed cash balance plans.

While we do not endorse or recommend any banks or financial institutions, many self-directed clients use Titan Bank or Solera Bank. Please do your own due diligence when selecting a bank. Please see the link to them below:

Titan Bank | Small Business | Solo 401k Bank Accounts

Self-Directed Checking (solerabank.com)

Every cash balance plan requires annual valuations of plan assets. This is rather simple for stocks, bonds, ETFs and mutual funds. But there are no published market prices for real estate and other “non-qualified” investments.

Because of the valuation requirement, you must determine the fair value of all plan investments. This is required because our actuary must certify to the IRS that the plan has enough assets at year-end to pay out future benefits. Determining the asset valuation at year-end is an essential step in the plan compliance process. You must consider hiring an independent, outside valuation expert or appraiser for the valuation process.

More Information:

https://www.irs.gov/retirement-plans/valuation-of-plan-assets-at-fair-market-value

In general, most ERISA rules are not applicable to solo plans, so you may file Form 5500-EZ. But when the plan has “non-qualified” assets, you are required to file Form 5500. This reason is that there is not a “solo participant plan” election on the Form 5500-EZ, so the retirement plan qualifies as a single-employer plan. As such, it falls under the bonding rules.

Bonding is essential because the Department of Labor (DOL) requires an annual plan audit for any plans that have fewer than 100 participants. However, the audit requirement is waived for plans that meet the following exceptions:

• Less than 5% of plan net assets are invested in “non-qualifying” assets or
• The plan obtains a fidelity bond covering 100% of the value of all “non-qualifying” investments.

Since most plans solely have qualifying assets like stocks, bonds, ETFs and mutual funds, there is no bonding or audit requirement. But when more than 5% of the assets are non-qualified assets and no audit is obtained, then the plan bonding in required.

However, bonding is not as challenging as you might believe. It normally costs a few hundred dollars annually and most bonding companies offer large discounts for purchasing multiple years up front.

Here is a bonding company we often use: https://www.colonialsurety.com/

Yes. There are substantially greater compliance issues. This includes the following:

• bonding requirements
• 5500 filings
• annual valuations

You are permitted to use a cash balance plan to invest in what is called “non-qualified” assets, such as real estate, mortgages, etc. But in general, we recommend against this for many reasons.

First, there is additional plan administration. The IRS requires year-end valuations, bonding, and a more extensive form 5500 filing. As a result of higher complexity and compliance, we charge an additional $500 annual fee for any plan with non-qualified assets.

Second, most of our clients have IRAs or 401(k)s. These plan types also allow self-directed investments. But because they are defined contribution plans and NOT cash balance plans, they do not have the same valuation issues or compliance problems like a cash balance plan does. So, they are much better retirement plans for real estate investments.

Third, cash balance plans are excellent when you want to make large, tax-deductible contributions. But real estate and other non-qualified assets generally offer more volatile returns. This can lead to inconsistent swings in funding ranges.

In fact, having very big investment returns will limit your future contributions. Substantial investment losses will increase future contributions. But if you have higher returns in an IRA or 401(k), you do not have the same limitation and restrictions.

I have clients who want to invest in real estate in a cash balance plan. But when I inquire about other retirement assets, they often have qualified assets (stocks, mutual funds, bonds, etc.) in a 401(k) or IRA. So, in general, I advise clients to use those plans first for real estate investments. Once those plans have fully utilized non-qualified assets, you can then use a cash balance plan to make further non-qualified investments. This assumes the client wants substantially all assets in real estate and other non-qualified assets.

But you certainly can own real estate in a cash balance plan if it meets your investment goals and you understand all the risks associated with it.

It’s crucial to remember that your defined benefit plan is a distinctly separate entity from you personally. This separation is designed to ensure that there are no prohibited transactions that would disqualify the plan or the investment transaction.

Therefore, it’s important to avoid depositing rent into your personal account or paying expenses personally. All income and expenses should be managed within the defined benefit plan.

You need to establish a bank account in the name of the defined benefit plan. All rental income and expenses should go through this account. In addition, you want to make sure you have enough funds in the account to pay for any large expenses that may occur. Again, you can’t pay for property expenses from your personal funds, so ensure you have adequate funds in the account.

To report year-end assets to us, you would report the fair market value of the property and the balance in the bank account.

A prohibited transaction in a retirement plan refers to certain activities or dealings between a retirement plan and certain related parties (called “disqualified persons”) that are forbidden by the IRS and the Department of Labor (DOL) under the Employee Retirement Income Security Act (ERISA). These rules are designed to prevent self-dealing, conflicts of interest, and misuse of retirement plan assets, ensuring that the plan is operated solely for the benefit of participants.

Types of Prohibited Transactions

1. Self-Dealing: Any transaction where a “disqualified person” (including plan fiduciaries, employers, and certain related persons or entities) uses the plan’s assets for their own benefit.
   • Example: A plan fiduciary borrows money from the plan for personal use.
2. Transfer or Sale of Assets: A disqualified person cannot sell, exchange, or lease any property between the plan and themselves.
   • Example: Selling real estate to your own IRA or 401(k) account, or using your plan to buy a property you own.
3. Lending Money or Extending Credit: Lending money between the plan and a disqualified person is prohibited.
   • Example: Taking a personal loan from your retirement plan (unless permitted under specific 401(k) loan provisions).
4. Furnishing Goods or Services: The plan cannot directly or indirectly provide services, goods, or facilities to a disqualified person.
   • Example: If you’re a business owner, you can’t have your 401(k) invest in your company or provide services to your own business.
5. Dealing with the Income or Assets of the Plan: Plan fiduciaries and disqualified persons are not allowed to deal with the income or assets of the plan for their own benefit or any third party.
   • Example: A plan fiduciary cannot divert plan funds for their own personal investments.
6. Receiving Compensation for Plan-Related Transactions: Plan fiduciaries cannot receive personal compensation or any financial gain from a transaction involving the plan.
   • Example: A plan trustee getting a commission for making a plan investment.

Who is a “Disqualified Person”?

Disqualified persons include:

Any entity (like a corporation or partnership) where the disqualified person owns 50% or more.

The plan fiduciary (anyone responsible for managing the plan or its assets).

The employer sponsoring the plan.

Service providers to the plan (e.g., financial advisors, accountants).

Relatives of disqualified persons (e.g., spouse, children, parents).

Here is some IRS information regarding prohibited transactions: Retirement topics – Prohibited transactions | Internal Revenue Service (irs.gov)

The 401(k) profit-sharing contribution is technically due before you file your tax return, with the latest date being October 15th. However, because this is the same deadline as the 5500, we must receive confirmation of the deposit by October 1st to complete the 5500 in a timely manner.

There are two types of contributions that can be made to a 401k plan: employee contributions and employer contributions.

1. Employer contributions – is an umbrella term that would describe any contribution that comes from the employer and is deducted on the business tax return.
2. Employer match – This is a type of employer contribution that is based on a participant’s employee deferral. Meaning that depending on if the participant withholds a retirement contribution, then the employer will match a certain percentage of that. (This would not accurately describe the annual employer contribution that you are making, so it would not be technically correct to refer to it as a match. Although, many people are more familiar with the concept of employer matches, so they use this terminology. You may have noticed we do not use this term when discussing your annual funding amounts).
3. Employer profit-sharing – May also be referred to as a non-elective employer contribution. These are discretionary employer contributions that an employer may give to eligible employees, typically used in high income years to take larger deductions and incentivize employees. If there are other employees in addition to the owner covered in the plan, then the profit-sharing amount would be determined through a series of compliance tests. Since your plan only covers you, employer profit-sharing can be used to fund the maximum permissible employer contribution each year. (This is more accurate for the annual contribution that you make, so we often use the phrase employer profit-sharing.)

Please note that no matter the specific terminology used, the total 401(k) employer contributions are limited to 6% of your W2, when you are max funding a cash balance plan.

You must contribute the after-tax or Mega Backdoor Roth before filing your tax return, including extensions.

So, the deadline is September 15th for S-corporations and partnerships and October 15th for sole proprietors and C-corporations.

However, because October 15th is the same deadline as the 5500 deadline, we must receive confirmation of the deposit by October 1st to complete the 5500 in a timely manner.

A SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) is a tax-deferred retirement savings plan designed for small businesses with 100 or fewer employees.

Key Features of a SIMPLE IRA:

• Allows employees to contribute a percentage of their pre-tax salary.
• Employers are required to make contributions by either:
  1. Matching employee contributions dollar-for-dollar up to 3% of the employee’s compensation, or
  2. Making a non-elective contribution of 2% of each eligible employee’s compensation.
• Contributions are tax-deductible for employers.
• Easy to set up and administer compared to other retirement plans like 401(k)s, with minimal paperwork and low costs.
• Funds grow tax-deferred until withdrawn in retirement, when they are taxed as ordinary income.

Advantages and Disadvantages

• Advantages: Low costs, easy administration, tax-deferred growth, and mandatory employer contributions.
• Disadvantages: Lower contribution limits than 401(k)s, no Roth option, early withdrawal penalties, and mandatory employer contributions for businesses.

In summary, a SIMPLE IRA is a straightforward retirement plan option for small businesses that want to offer employees a way to save for retirement with tax advantages and employer contributions.

Many people don’t know that when a 401(k) profit-sharing plan is combined with a cash balance plan, the profit-sharing contribution is reduced.

A standalone 401(k) plan allows a profit-sharing contribution of up to 25% of W2 compensation. However, when a cash balance plan is combined with a 401(k) plan, the profit-sharing contributions are limited as noted below:

1. The employer contribution in the 401(k) plan cannot exceed 6% or compensation or “deemed” wage for a sole proprietor. This includes the total of all Safe Harbor/Non-Elective contributions and profit-sharing.
2. A total employer contribution of up to 31% of compensation between both plans. This would include the cash balance plan contribution, Safe Harbor Match/Non-elective contribution and the profit-sharing contribution.

In general, for a business owner looking to maximize their contributions, we calculate funding amounts that will follow the 6% limitation rule with the 401(k) plan. This allows for a substantial cash balance plan contribution.

A “combo” plan is still subject to nondiscrimination rules and compliance testing. These rules are in addition to the combined plan limitations. This also impacts the contributions for each participant. Our actuary must review and certify the amounts annually to ensure the combined plans meet qualified plan requirements.

No, you may not. You are not allowed to contribute to a SIMPLE IRA in any year that an employee/participant either: (1) receives a contribution in a defined contribution plan, such as a 401(k), profit-sharing plan, money purchase; or (2) accrues a benefit within a cash balance plan for a plan year beginning or ending in the calendar year.

Yes, you can. But the IRS has some limitations and restrictions. In most situations, this will not be allowed to make a pre-tax contribution to an IRA. You can see more here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

Yes, you can. But there are a few rules and considerations.

You can make an employee deferral without restriction. However, your profit-sharing contribution will be limited. Rather than the normal 25% limit, you can only do 6% of compensation. But approximately 90% of our clients have both plans.

You can combine a SEP with a cash balance plan in some situations.

First, it must be a “non-model” SEP and NOT subject to IRS Form 5305. Second, SEP contributions are limited to 6% of compensation for a non-PBGC covered plan.

In practice, many SEPs are “non-model” plans and, as a result cannot be combined with a cash balance plan. So, if you are planning to establish a cash balance plan and you currently have a SEP, ensure you don’t fund the SEP yet.

If you already have funded a SEP and want to set up a cash balance pension plan, make sure you talk with us first. Depending on your situation, you may be able to have those funds reversed and disbursed back to you without incurring any taxable income or penalties.

The companies below have non-model SEPs:

• Charles Schwab
• Merrill Lynch
• Morgan Stanley
• American Funds

Before you proceed, ensure that you confirm with your investment custodian that you have a non-model SEP that was not set up using Form 5305.

In general, 401(k) plans will limit the profit-sharing contribution to 25%. The employee deferral is only limited by the amount of earned compensation.

When a 401(k) plan is combined with a cash balance plan, the rules state that the business is restricted to making a 6% maximum contribution under the profit-sharing plan. There is no restriction on the employee deferral since it is contributed by the employee and not the employer. So, the final contribution could be as follows:

• Employee deferral (elective or optional)
• Profit-sharing match up to 6% (elective or optional)
• Cash balance plan contribution (mandatory)

A backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA, even if their income exceeds the annual limits set by the IRS. Here’s how it works:

1. Make a non-deductible contribution to a traditional IRA. There are no income limits for making non-deductible contributions to a traditional IRA.
2. Convert the traditional IRA funds to a Roth IRA. This is known as a Roth conversion. Since the contribution was non-deductible (you’ve already paid taxes on it), there is little to no tax due upon conversion.
3. The converted funds can now grow tax-free, and qualified distributions in retirement from the Roth IRA will also be tax-free.

The key benefits of the backdoor Roth strategy are:

• Allows high-income earners to fund a Roth IRA when their income exceeds the annual Roth IRA contribution limits.
• Provides a tax-advantaged account for tax-free growth and tax-free withdrawals in retirement.
• Allows for tax diversification in retirement accounts.

However, there are a few important considerations:

• You cannot recharacterize or undo the Roth conversion after it’s done.
• The pro-rata rule applies if you have existing pre-tax IRA funds, which could trigger taxes on the conversion.
• There are income limits ($153k-$228k for married filers in 2023) where direct Roth contributions begin to phase out.

The backdoor Roth IRA is a legal strategy recognized by the IRS that provides an avenue for high-income individuals to fund a Roth IRA despite the regular income limits. However, it’s advisable to carefully evaluate your specific situation and potentially consult a tax professional.

A standalone 401(k) plan allows a profit-sharing contribution of up to 25% of W2 compensation. However, when a cash balance plan is combined with a 401(k) plan, the profit-sharing contributions are limited as noted below:

1. The employer contribution in the 401(k) plan cannot exceed 6% or compensation or “deemed” wage for a sole proprietor. This includes the total of all Safe Harbor/Non-Elective contributions and profit-sharing.

This particular rule is not given much attention because it is not applicable in most cases. In reality, you need to comply with either the 6% rule or the 31% rule. The 31% rule limits cash balance or defined benefit plans to 31% of the employee’s compensation. However, in most scenarios, you can receive a contribution of 75% or more to a defined benefit plan. Therefore, restricting it to 31% does not make much sense when considering plan fees and administration. But, it could be beneficial in certain situations if you want to receive a higher contribution overall.

A 412(e)(3) plan, also known as a “fully insured” or “insurance contract” defined benefit plan, is a type of retirement plan designed for small businesses and self-employed individuals. 

It is a defined benefit pension plan funded exclusively by life insurance, annuity contracts, or a combination of both from a life insurance company. It is also exempt from typical defined benefit plan actuarial certification and minimum funding requirements if meeting specific IRS criteria.

In essence, 412(e)(3) plans leverage insurance products to deliver substantial tax-deductible contributions and guaranteed retirement benefits for small business owners and self-employed individuals, subject to meeting IRS requirements.

The Pension Benefit Guaranty Corporation (PBGC) is a government agency in the United States that was established under the Employee Retirement Income Security Act of 1974 (ERISA). Its primary function is to provide insurance for participants in private company defined benefit pension plans. In other words, it acts as a safety net for employees in these plans, so that they can receive at least a basic level of retirement benefits if their employer’s pension plan becomes insolvent or is terminated with insufficient funds.

The PBGC collects insurance premiums from covered plans and invests those funds to support its mission. If a covered plan cannot pay promised benefits due to financial distress or plan termination, the PBGC steps in to assume responsibility for the plan and pay benefits up to certain limits set by law. It also provides insurance coverage for cash balance plans, ensuring that participants receive their promised benefits even if the plan cannot meet its obligations.

Understanding the role of the PBGC is crucial in comprehending the safeguards in place for individuals’ retirement savings, especially with the growing popularity of cash balance plans. The PBGC plays a critical role in protecting the retirement security of millions of workers and retirees across the United States, providing assurance that their hard-earned pension benefits will be safeguarded even in the event of employer bankruptcy or other financial challenges.

The PBGC covers limitations to the benefits and private sector entities. An employer-sponsored cash balance plan may be exempt from PBGC coverage if the plan:

• is solely for owners
• does not cover more than 25 active participants and is maintained by a professional service employer
• is used as excess benefit plans for certain employees
• is for Indian tribal governments

The key distinction from the specification above is the phrase “professional service employer.” Though you may consider yourself a professional, you may not qualify as one in the eyes of the PBGC.

The following list was provided from the PBGC professional services exempted from coverage.

• physicians
• dentists
• chiropractors
• other licensed practitioners of the healing arts
• lawyers
• CPAs
• public engineers
• architects
• draftsmen
• actuaries
• psychologists
• social or physical scientists
• performing artists

This list is incomplete, and there is a process for submitting a request for coverage determination with the PBGC. The form can be mailed or emailed to the PBGC directly, and extensive instructions are on their website.

Not necessarily. If you worked less than 1,000 hours during the year, you likely will not earn a pay credit and will likely not have to fund the plan that much if at all. By keeping the plan open and not frozen, it will still improve your overall plan funding.

Freezing a plan actually only works in some limited situations. For example, if you thought the next couple years we’re going to have lower income, but you’re going to have higher income a couple years down the road, it might make sense to freeze the plan and then unfreeze it when you have higher income in the future.

In order to freeze a plan, you’ll have to pay an amendment fee. If you decide to terminate the plan, then you’ll have to roll the assets out and potentially set up a new plan down the road. So, the additional fees can add up if you think your current year income is low but will be higher in future years.

Yes, you can terminate a plan. However, you want to ensure that it’s a business necessity. A business necessity would typically involve reduced business profits, change in equity ownership, or a problem that limits plan funding. The IRS has in the past accepted the fact that a business adopted a different retirement plan design as a valid termination reason.

When you terminate a plan, you do have an option to file Form 5310 with the IRS. When this IRS form is filed, you are asking the IRS to make a formal determination on the plan’s qualification status at the time of termination. It will not say that the plan funding was accurate, and it does not ask the IRS to certify or sign off that all funding and compliance since inception was approved.

In practice, many clients don’t file form 5310 too frequently. This is for the following reasons:

1. They can be expensive to file (often costing approx. $6k).
2. The IRS can take more than a year to process.
3. Many plans were already drafted on pre-approved plan documents.
4. The IRS is not “certifying” that the cash balance plan was operated and funded correctly.

In many situations, Form 5310 is filed for businesses with many participants (50+) or when there are many partners/shareholders in a professional practice (like 30 physicians or doctors). The reason for this is that there could be a potential problem with a specific participant and the IRS determination letter may be helpful. In addition, it can make more sense if you have a custom plan design or a history of compliance problems.

Most solo business owners would not pay to complete and submit Form 5310. If you want to discuss this option in more detail, please reach out to us.

First, before you proceed with termination, we would want to discuss your situation and make sure termination is the best solution in your situation. As a result of the IRS permanency rules, there should be a reasonable cause to terminate. 

So, if you have a plan open for 3-5 years and then you terminate with reasonable cause, you’re most likely fine to terminate the plan. You may then complete the termination request form which will discuss the necessary questions we’ll need to begin the termination process, explain the process, make any final contribution (if necessary), and file your final reports. For a step-by-step guide, we have a detailed article that helps walk you through all the specific steps to terminate your cash balance and/or 401k plan(s).   

Not necessarily. You can make an “in-kind” rollover of your investment assets into an IRA, or another qualifying retirement plan. So, you are not required to sell your current investments. 

Please note that whichever IRA or retirement plan you intend to rollover your assets into might not be able to hold or “custody” your assets depending on the custodian. It’s important to confirm with the investment custodian that they are able to transfer your exact investment holdings.

Here is a detailed article and video on our website that helps break down the rollover & distribution process. 

Yes, you can often make a final year contribution prior to terminating a plan. Depending on the funding requirements of your plan and whether a benefit was accrued for the year, there could be a mandatory funding amount for the year.

Upon termination, all participants will become fully vested on the termination date. This includes any participants who are not 100% vested at the time of termination.

You are required to notify all plan participants that the cash balance or 401(k) plan will be terminated within 60 days of the date of termination, but not more than 90 days prior to the proposed date of termination. 

In most situations, you have the option to distribute the funds out to them and send them a 1099-R. You don’t want to keep the cash balance plan open indefinitely because you will have to pay annual administration fees. 

The termination process can take up to 6-8 weeks. So, we require all termination requests to be made two months prior to your plan year-end. For a calendar year plan, the deadline is November 1st. 

That is ultimately your decision. You can set up an IRA to roll your funds over into, or you can roll the funds into a qualified plan like a 401(k) plan. 

You also can take a cash distribution in lump sum. Depending on your age, there may be a required minimum distribution (RMD). But in any case, the distribution will become a taxable event and possibly be subject to a 10% penalty if you are not age 59 1/2. 

If you or any employee has an outstanding loan, they must pay it back before the plan terminates. If the participant does not pay off any outstanding loan balance, the loan amount becomes taxable, and a 1099-R is issued.

Terminating a plan involves our annual administration fee plus a termination fee. The termination fee varies depending on the number of participants and whether there is also a 401(k) plan.

Please see our pricing page for details: https://www.emparion.com/plan-pricing/

In most situations, a termination is required or the best approach. But if your intention is to terminate the plan and then possibly restart a plan, you may be better off simply freezing the plan. 

It comes down to preference. However, since timing is essential, keeping the assets at the same institution simplifies the asset transfer.

For example, if your retirement accounts are at Fidelity, rolling the assets into an IRA account with Fidelity is usually the easiest and quickest way to complete the rollover.

So, our recommendation would be to use an existing account if one exists at the same investment institution, or if you do not have one, it may be easier to open a new IRA. Our only reason for this suggestion is because the process needs to be completed by the end of December. You can always move the assets to a different institution in the future.

Since both of the plans are closing, there is no need to track the assets separately after the distribution occurs, so there is no issue rolling all assets into the same IRA account. This assumes that all current plan assets are pre-tax. If there are any Roth assets, they would need to be rolled into a Roth IRA.

Yes, you can. When a plan is terminated, you may roll over the funds into a 401(k) plan or other qualified plan types. Most people will rollover the funds into an IRA for simplicity. This is because when the funds are rolled into a 401(k), there is usually an ongoing 5500 filing requirement.

In fact, you can basically roll over any qualified retirement plan into your IRA or 401(k). For simplicity, please ensure that rollovers go directly from one custodian to the other.

Upon termination, you can roll the account balance over into an IRA. You may distribute the funds out in a lump sum payment or, alternatively, roll the lump sum into an IRA.

Because the money in the cash balance plan has not been taxed, you can elect to deposit the money into a traditional IRA. A traditional IRA is still tax-deferred until retirement, so there is no tax upon this distribution.

Yes, you can do this. However, there are some pitfalls to consider.

The main advantage of doing this is that you get the funds out of the defined benefit plan, which is limited to a 5% interest credit rate, into an IRA that does not have the same limitations. From an investment standpoint, this makes a lot of sense. However, there are three main pitfalls to consider when you do this:

• Your 415 limit is the most you can roll out in a given year, so you may not be able to roll the entire balance out.
• Any amount rolled out would then not be eligible for cost-of-living adjustments that would be applicable if the funds were retained within the defined benefit plan. Essentially, this can limit your overall amount in the defined benefit plan. If you had kept the money in the plan, you could possibly have a higher defined benefit plan balance upon final termination.
• Remember that defined benefit plans are permanent plans. So, if you were ever audited, the IRS might consider that the plan is not technically being used as a defined benefit plan and they could potentially disqualify any contributions.
• The rollovers and funding must be reviewed and tracked by our actuary so there are higher administration fees. We charge an extra $500 annually to maintain plans with in-service distributions. 

A Qualified Domestic Relations Order (QDRO) is a legal document or order that’s used in divorce proceedings to divide retirement plan assets between spouses. Specifically, a QDRO allows for the division of certain retirement plan assets (such as 401(k) plans and pensions) without triggering taxes or penalties that usually apply to early withdrawals.

Here’s a breakdown of what a QDRO involves:

1. Purpose: It directs a retirement plan administrator to pay a portion of one spouse’s retirement benefits to the other spouse or a dependent, typically as part of a divorce or legal separation.
2. Types of Plans: QDROs apply to employer-sponsored retirement plans governed by ERISA, like 401(k)s and pensions, but not IRAs (though IRAs can be divided differently in a divorce without a QDRO).
3. Avoiding Taxes and Penalties: Normally, early withdrawals from retirement accounts are taxed and may include penalties. However, with a QDRO, the spouse receiving the distribution (the “alternate payee”) can receive funds without penalty if handled correctly. Taxes may still apply when the funds are withdrawn, depending on how they’re transferred or reinvested.
4. Details Required in a QDRO: The order must be detailed, specifying the amount or percentage of benefits to be paid to each person and how it should be paid. The QDRO must comply with the retirement plan’s specific requirements and is then submitted to the plan administrator for approval.
5. Distribution Options: The alternate payee can choose to roll over the funds into their own retirement account or receive them directly, though this depends on the plan rules.

A QDRO is essential for anyone going through a divorce where retirement assets are involved, as it ensures a clear, tax-efficient transfer that protects the rights of both parties.

Here are some add’l resources:

https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/division-of-retirement-benefits-through-qualified-domestic-relations-orders.pdf

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/faqs-drafting-qualified-domestic-relations-orders.pdf

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order

https://www.irs.gov/publications/p504

This rule comes into play when an employee leaves the company at age 55, or later and wants to withdrawal funds from their employee-sponsored 401k Plan without the 10% early withdrawal penalty. This rule is a provision by the IRS so although you may not pay the 10% penalty, you will still pay the 20% federal income tax, plus possible state taxes. It is recommended to reach out to a tax professional.

Since this rule requires the employee to have left the employer, it does not make sense for our clients.

Required Minimum Distributions (RMDs) are the minimum distribution amounts a retirement plan holder must withdraw or distribute annually at a certain age.

Retirement plan employee/participants and IRA owners must calculate and withdraw the RMD timely each year. The IRS has stiff penalties for any RMD failures.

For IRA owners and defined contribution plan participants who passed away subsequent to December 31, 2019, the entire balance of the plan participant’s account is required to be distributed within ten years. The IRS does allow exceptions for surviving spouses, chronically ill or disabled people, or people who are not more than ten years younger than the participant or IRA holder. The 10-year rule is applicable whether or not the participant passes away before or after the required beginning date.

Generally, you must take an RMD from your retirement plans even when you are still employed by the company.

However, you may qualify for an exception if you meet both the below criteria:

• You’re still employed by the business; and
• You do NOT own more than 5% of the business.

If you meet both of the above conditions, you may delay taking the RMD until April 1st of the year after you retire from the company. However, these exception rules don’t apply to IRAs.

Yes. Both plans are subject to RMDs.

In general, an RMD is calculated for each qualifying retirement account by dividing the prior December 31st balance by the life expectancy factor as published by the IRS in the Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You can select the life expectancy table based on your specific situation. There are separate tables for Joint and Last Survivor, Uniform Lifetime and Single Life Expectancy. The IRS also has worksheets to calculate the RMDs.

An IRA owner must calculate the RMD separately for each IRA, but the amount may be distributed from the total amount from one or more of the IRAs.

However, any RMDs that are required from other retirement plans, such as 401(k) plans, cash balance plans and other cash balance structures, must be distributed separately from each of those specific plan accounts.

The SECURE Act 2.0 increased the RMD age from 72 to 73 in 2023, and then to age 75 in 2033 (or the year of retirement, if later, for certain plan participants who are not 5% owners). People who were born in 1950 or earlier are not impacted by this change and must take the RMDs due for 2022 and later years.

This change is effective for any distributions that are required in 2023 and subsequent years, for individuals who reach age 72 subsequent to December 31, 2022.

You may delay the first RMD until April 1st of the year following the year you are required to take the RMD. However, for subsequent years, including the year you received the first RMD, you must withdraw the RMD by December 31st of the respective year.

The account owner is ultimately responsible for calculating and withdrawing the RMD amount. However, the amount is normally calculated by the IRA custodian or third-party administrator.

Yes. The RMD is the minimum amount that must be withdrawn. The account owner may withdraw as much as they want.

If an account owner fails to withdraw the required RMD amount by the deadline, the amount not withdrawn is taxed at a rate of 50%. The account owner must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts with their personal federal tax return for the related year in which they failed to take the RMD.

Yes. The IRS can waive the penalty when the account owner establishes that the withdrawal shortfall resulted from a reasonable error and that they are taking steps to remedy the issue. In order to qualify for this relief, you must file IRS Form 5329 and attach a statement to the tax return explaining the circumstances. See the instructions for Form 5329.

No. The account owner is not allowed to carryover any excess RMD amount to subsequent years.

The account owner is taxed at their ordinary tax rate on the distributed amount. However, when the RMD amount includes a return of basis or a qualified distribution from a Roth IRA, it is tax-free or taxed based on the pro-rated amount.

No. You may not rollover any RMDs to another tax-deferred account. You must distribute the funds as a taxable transaction.

Yes. But there are some issues you should understand before you proceed.

You may borrow the lower of 50% of your vested account balance or $50,000. Remember it is the lower of these two amounts. The maximum loan amount is calculated based on your “hypothetical” account balance and NOT the entire investment balance in the cash balance plan account.

Cash balance plans are normally set up using three-year vesting. As such, you may not borrow from the plan in the first three years unless the plan is amended to allow immediate vesting. 

Because we do not manage plan investments, ensure you confirm with your investment custodian that they can process the loan request. In addition, the investment custodian must be able to receive the loan payments.

There are also loan administration fees as follows:

• Plan Amendment Processing- $250
• Drafting Loan Document – $150
• Amortization Schedule – $150
• Total Loan Setup Fee = $550

In addition to the above fees, the loan balance must be reported on Form 5500 when submitted to the IRS. In addition, the end-of-year loan amount is included in the final actuarial valuation. The additional annual reporting adds $150 to the normal annual administration fee beginning in the following year. This added fee is in place for each year the loan is outstanding.

Loan payments are required to include both principal and interest and must be repaid monthly or quarterly with a term of five years (unless the loan qualifies for an exception). As the plan’s trustee, you are responsible for monitoring compliance and reporting any taxable events to us.

As a result of the added costs and the increased compliance issues, we want clients to make sure this is something they really want to do. In many situations, there are easier approaches to raise the necessary capital. Once the loan paperwork is processed, we cannot refund on our administrative costs.

Feel free to let us know if you want to proceed with a loan request and we can invoice for the above fees and start the loan process.

Once we receive payment, we will draft loan documents based on your specific answers to the following loan questions:

1. What is your desired loan amount?
2. What is the planned loan date?
3. Do you want monthly or quarterly payments?
4. What interest rate do you want?
5. Name of person who is taking out loan.
6. Address of the person taking out loan.

Once the above information is received, we will draft the loan documents and amortization schedule. We will then send them to you electronically for your review and signature.

You must then submit the loan paperwork to your custodian. Please ensure that the fund distribution is clearly labelled as a cash balance plan participant loan.

Interest must be assessed at a reasonable rate. The interest charged must be consistent with interest rates assessed by lenders for a loan made under similar situations. If it meets these criteria, it is generally considered reasonable. 

Based on recent IRS guidance, the following rates may be considered reasonable: 

•  A CD rate + 2 percent
•  The prime rate + 1 percent

The default rate we use is prime rate + 1 percent.

Loan payments should be made by check or electronic transfer from your personal checking account and NOT from your business or from the cash balance plan investment account. They should be payable in the name of the cash balance plan.

Make sure you write “Participant Loan Payment” on the memo line of the check or include it in the electronic distribution. As plan trustee, make sure to deposit or transfer the loan payments into the cash balance plan investment account.

You, as the trustee, must track the loan payments. The amortization schedule and the investment account statements support this purpose.

Any default under the payment terms must be reported to us and we will issue a 1099-R after year-end.

There are no restrictions on how the funds are utilized. The company cannot place any restrictions on the use of the loan that would benefit itself or another party in interest.

The loan is secured by up to 50% of the fair value of the employee’s vested account balance (subject to the $50,000 limit). Fair value is determined at the time the loan is initiated.

In general, loan proceeds are not taxable. The following conditions must be in place to avoid any taxation when the loan is issued.

1. The loan is to be repaid in full within five years (unless the plan loan is for the employee’s principal residence). 
2. The loan provisions must require amortization of principal and interest.
3. Payments must be made at least quarterly. For example, a five-year loan term with interest only payments and a final balloon payment at the end does not qualify. 
4. The loan must be evidenced by a legally enforceable loan agreement.
5. The loan is limited to the lower of: (1) $50,000; or (2) one-half of the employee account balance or vested accrued benefit (if a cash balance plan).

Yes. IRS rules and regulations require that interest rates be reviewed each time a specific loan is originated or modified.

As a result, you are not able to select a specific loan rate when the plan is established and use that rate throughout the entire life of the plan. Loan interest rates must be reviewed and updated to ensure they are consistent with normal lending practices.

In general, loans must repaid in full within five years from the loan date. An exception to the five-year rule exists for loans that are used for the acquisition of the employee’s primary residence.

When an employee desires a repayment period more than five years, the employee must sign a sworn statement certifying that the loan was used to purchase the participant’s principal residence.

If loan payments are not made timely, the loan balance is considered a taxable distribution. As a result, it is subject to a 10% early withdrawal penalty assuming the participant is under age 59 1/2. In such a case, code L is used on IRS Form 1099-R to report the taxable distribution.

The law does allow a grace period. The participant may avoid an immediate deemed distribution following a missed scheduled payment. However, the grace period may not be extended later than the last day of the calendar quarter following the calendar quarter in which the required scheduled payment was due.

If the payment is not made within the grace period, it is considered a deemed distribution and will be subject to a Form 1099-R filing and will be taxable to the participant.

Yes. You are allowed to take out multiple loans up to $50,000 less the highest outstanding balances over the prior 12 months of all plan loans outstanding at any time over the prior 12 months. 

For example, let’s assume you: (1) had a previously taken a loan with the highest outstanding balance of $8,000 over the prior 12 months; and (2) within the past 12 months, you took out a second loan of $12,000 and paid it off in full, you can then take out a third loan equal to 50% of your investment balance up to $30,000.

When a loan defaults, the loan value at the time of default becomes taxable and is reported to the employee and the IRS using Form 1099-R. 

Distribution code “L” is used for a defaulted loan assuming there is no offset of the balance due to a plan distribution triggering event. When an offset occurs, the actual distribution is reported according to the participant’s age, and code L is not applicable. 

The following example illustrates the reporting for a defaulted loan:

John has a cash balance plan balance consisting of $100,000 in mutual funds and a $30,000 outstanding loan for a total account balance of $130,000. Phil then defaults on the loan, which results in a deemed distribution of $30,000. 

For the year of the default, the plan administrator will issue a Form 1099-R showing a gross distribution of $30,000 in Box 1 and a taxable distribution of $30,000 in Box 2a. The distribution code would be “L” for a loan treated as a deemed distribution without any loan offset. 

After several years, John closes his business and requests a distribution of his cash balance plan account balance. At this date, the plan assets consist of $150,000 in cash and $25,000 remaining loan balance for a total of $175,000. 

Prior to the distribution, the administrator will offset the $25,000 outstanding loan against the $25,000 loan receivable in the plan, leaving $150,000 as the final balance valuation. The administrator will then issue Form 1099-R with a gross distribution of $150,000 in Box 1 and a taxable amount of $150,000 in Box 2a.

Unfortunately, no. The $50,000 limit is per person and per company. It is not a per plan limit.

The IRS says that the participant loan limit must consider all loans from all plans of the company. You can find more info here: Issue Snapshot – Borrowing Limits for Participants with Multiple Plan Loans | Internal Revenue Service (irs.gov)

The 50% or $50,000 limit is per person and also per employer. So, if both you and your wife have vested account balances that are at least $100,000, you can each take out a $50,000 plan loan.

Yes. Once the loan documents are approved and signed, we can issue a letter to your investment custodian that authorizes the distribution.

Please be aware that many custodians have their own language and authorization requirements. So make sure you reach out to them first to avoid any confusion.

Any letter that we have could look like the following:

As long as the pretax and after tax funds are held in one 401(k) plan, then you only need one loan agreement. However, when you make payments on the loans, you need to allocate the loan payment between the pretax account and the Roth account.

For example, if 40% of your loan proceeds came from your Roth account, then you’ll need to allocate 40% of your loan payment to the Roth account with the remainder going to the pretax account.

As a general rule, you will need to make payments on a monthly or quarterly basis. The IRS does not allow a payment schedule that is greater than quarterly.

Remember that your loans are limited to 50% of the vested account balance or $50,000, whichever is lower. These rules are also per person, per company. So you’re not able to take out $50,000 from each plan.

If given the choice, you always want to take the loan from the 401(k) plan. This is beneficial for the following reasons:

1. The define benefit plan requires approval from a spouse and this is not required for a 401(k).
2. Most cash balance plans have three year vesting, so any loan would be limited to the vested amount.
3. Lastly, any loan taken from a cash balance plan becomes a receivable in the plan itself. This loan receivable is subject to fair market value estimates, and could be subject to impairment if a participant was behind on the loan. However, your 401(k) contributions are not dependent on ending asset values.

As a result of the above, we highly recommend that participants first consider taking loans from 401k plans.

When it comes to define benefit plans, there is a unique requirement that loans be approved and notarized by a spouse. This is only for to find benefit plans and does not cover 401(k) plans. You can find out more about this here:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qualified-joint-and-survivor-annuity

Because of the above costs and the compliance issues, we advise clients to make sure a loan is really something they want to do. In most situations, there are easier ways to raise necessary funds. 

You may want to consider other options if you need money immediately (such as for a car or home down payment). In addition, interest rates are approaching 10%, so taking money out of retirement accounts is much more expensive than it once was.

A couple other funding options you could consider:

1) Home equity line of credit; 

2) Distributions from other non-retirement plans or investment accounts.

In addition, please remember that you have until the date you file your tax return (including extensions) to fund your plan for a given year. You can certainly hold off on current-year contributions and use current funds to fund any other expenses.

While the IRS allows you to take a loan from a 401(k) plan, loan options must be written into the plan document. While Emparion plan documents already allow loans, many basic plan documents from large investment platforms, like Vanguard, Fidelity, or Schwab, do not.

So, if you’re interested in getting a loan, Emparion may need to set up a new 401(k) plan for you that allows loan provisions. Then, you can set up a new investment account and roll the funds from your old 401(k) over into the new 401(k). Of course, you would be charged a set-up fee for the new plan, but that is an option for you.

Form 5500 is an annual reporting form that employers must file with the Department of Labor (DOL) and the Internal Revenue Service (IRS) to provide information about their employee benefit plans. The key points about Form 5500 are:

• It is required to be filed for any employee benefit plan covered by the Employee Retirement Income Security Act (ERISA), including pension plans, individual retirement accounts (IRAs), medical/dental/life insurance plans, severance pay plans, and more. 
• The purpose of Form 5500 is to provide the DOL and IRS with information to ensure employers are properly managing and protecting their employees’ benefit plans. 
• The specific version of Form 5500 that must be filed depends on the size and structure of the plan, with options including:
  • Form 5500 for plans with 100 or more participants
  • Form 5500-SF for plans with less than 100 participants
  • Form 5500-EZ for plans with only one participant (owner/partner and spouse) 
• Employers must file Form 5500 electronically through the EFAST2 portal by the last day of the 7th month after the plan year ends, or face penalties for late or incomplete filing. 
• Common errors to avoid include incorrectly reporting zero plan participants and exceeding contribution limits.

In summary, Form 5500 is an important annual reporting requirement for employers offering ERISA-covered employee benefit plans, providing transparency and compliance oversight.

The deadline to file Form 5500 is the last day of the 7th month after the plan year ends. 

For plans following the calendar year (plan year ending December 31), the filing deadline is July 31. 

Employers can request a 2 1/2 month extension by filing Form 5558, which would extend the deadline to October 15th. 

• For non-calendar year plans, the filing deadlines vary based on the plan year end date:
  • Plan Year End | Filing Deadline | Extension Deadline
  • 1/31 | 8/31 | 11/15
  • 2/28 | 9/30 | 12/15
  • 3/31 | 10/31 | 1/15
  • And so on through 12/31 | 7/31 | 10/15

In summary, the standard deadline to file Form 5500 is the last day of the 7th month after the plan year ends, with a possible 2.5 month extension available by filing Form 5558.

We often complete form 5500 even when the total amounts are below $250k. The main reason is that it starts the statute of limitation with the IRS, it helps with reconciling the account contributions, and it protects us both in case there was other plans outstanding that triggers the 5500 filing.

If the total assets of a one-participant plan and the assets of all other one-participant plans maintained by the plan sponsor at the end of the plan year exceed $250,000, the sponsor is required to file a Form 5500-EZ for each of their one-participant plans. It’s important to note that some plan sponsors mistakenly believe that the $250,000 filing requirement applied individually to each plan, each participant, or each investment. The total assets are total by year end of the calendar year.

See this IRS article for add’l insight: https://www.irs.gov/retirement-plans/financial-advisors-are-assets-in-your-clients-one-participant-plans-more-than-250000

IRS Form 5558 is filed to apply for a one-time extension to file Form 5500. A separate Form 5558 is required to be filed for each retirement plan for which an extension is needed. As an example, if a company has a cash balance plan and also a 401(k) plan, a separate Form 5558 must be filed for each of the plans.

The deadline to file Form 5558 is July 31st for the previous calendar year. The form allows an extension of 2 1/2 months or up to October 15th to file form 5500.

Unfortunately, the IRS is unable to confirm acceptance of Form 5558. However, we rarely encounter issues with extensions being rejected. In addition, we file extensions using a certified letter that shows evidence of the filing. As a result, we rarely see extension filing problems.

Clients will need to ensure they communicate to us the need for an extension, even though we will typically file one if we do not have the information to file a completed form 5500. As long as you communicate the desire to file an extension, we will take the responsibility for submitting the extension and dealing with any IRS issues should they claim it was not received.

On occasion, the IRS issues letters confirming that the extension was received and requesting that a 5500 be filed by the October 15th deadline.

If you receive this letter, you may forward it to us. But there is nothing else you need to do. We will be responsible for the filing deadline and ensuring you meet the requirement as long as we receive all applicable filing information.

So, in generally, you can just retain the letter for your records, and we will confirm when the final form 5500 is completed. We will also upload it into your SmartVault account.

This is technically correct. However, we always recommend filing form 5558 for a few reasons.

Companies are automatically granted an extension of time to file Form 5500 until the extended due date of the company’s federal tax return (and are not required to file Form 5558) if the company meets all of the following conditions:

1. The plan year and the company’s tax year are the same;
2. The company has been granted an extension of time to file its federal tax return to a date later than the normal due date for filing Form 5500; and
3. A copy of the extension application to file the federal tax return is retained with the retirement plan records.

There should be a check mark under the “automatic extension” box in Part I, line B at the top of the form. An extension that is granted using this exception cannot be further extended by filing Form 5558 subsequent to the normal due date (without extension) of Form 5500.

The one big negative with this option is that the Form 5500 is due on the date the tax return is required rather than then extension date of Oct 15th if filed with form 5558. For example, an S-Corp tax return is due on Sept 15th and if form 5558 is filed then the 5500 is due on Oct 15th. If this method is selected, then the form 5500 is due on Sept 15th just like the S-Corp.

IRS Form 5558 is filed to apply for a one-time extension to file Form 5500. A separate Form 5558 is required to be filed for each retirement plan for which an extension is needed. As an example, if a company has a cash balance plan and also a 401(k) plan, a separate Form 5558 must be filed for each of the plans.

The deadline to file Form 5558 is July 31st for the previous calendar year. The form allows an extension of 2 1/2 months or up to October 15th to file form 5500.

Form 1099-R is an IRS information form that reports potentially taxable distributions from certain types of accounts, many of which are retirement savings accounts. The key points about Form 1099-R are:

• It is used to report distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions.
• Anyone who receives a distribution over $10 from these types of accounts should receive a 1099-R form.
• The form is provided by the plan issuer or account custodian.
• Form 1099-R is also used to record death or disability benefits paid out to a beneficiary’s estate, as well as account rollovers and loan defaults.
• The form contains detailed information about the distribution, including the gross amount, taxable portion, any taxes withheld, and distribution codes to specify the type of distribution. 
• Recipients of a 1099-R will need to use the information on the form when filing their tax return to properly report the income. 

In summary, Form 1099-R is an important tax document that reports distributions from retirement accounts and other similar plans, which the recipient must then account for on their tax return.

Form 1099-R must be filed with the IRS each year to report distributions from retirement accounts, pensions, annuities, and other similar plans.

• The deadlines for filing Form 1099-R for the 2023 tax year are:
  • Recipient copy: January 31, 2024
  • Paper filing: February 28, 2024
  • E-filing: April 1, 2024

In summary, Form 1099-R must be filed annually by the end of January for the recipient copy, and by the end of February/April for IRS filing, for any distributions of $10 or more from retirement accounts, pensions, and similar plans during the previous tax year.

Your retirement plan is a tax-exempt trust. As such, you should not be receiving a 1099-DIV, 1099-INT, or 1099-B for any investment earnings. These 1099s would only be issued for non-qualified brokerage accounts. If you received one of these forms, your investment custodian has likely set up your plan incorrectly. Please contact them ASAP so that these forms are corrected.

In addition, you should not be receiving a 1099-R each year. These 1099s are issued for retirement distributions. So, if you rolled money over or distributed money from one of your plans, then you would receive this form.