Cash Balance Plan Administration: Top Tips

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The fiduciaries are responsible for overseeing the administration of the plan. The fiduciaries need to understand the legal requirements for retirement plans and monitor compliance. There are some aspects to plan administration, including:

  • Enrolling and covering the right employees.  
  • Selection and monitoring of the administration firm.  
  • Correction of problems.  
  • Handling IRS audits and DOL investigations.  


Is the plan sponsor a member of a controlled group or affiliated service group, requiring that employees of other companies be considered for testing or inclusion in the plan?  

Could there be other workers, such as temporary employees, leased employees, or misclassified independent contractors, who could be entitled to benefits under the plan? Is the plan properly drafted to exclude those workers if they are reclassified as common law employees?  

Just asking the questions is not enough. The factors are fact-intensive, and the analysis is complex. For example, the study of a potential affiliated service group–and its consequences and planning alternatives–requires knowledge of Internal Revenue Code provisions and an understanding of the ownership of the entities and how they work together to provide their services to their customers.

Cash Balance Plan Administration

How does a plan sponsor know to ask the right questions and, once asked, analyze the answers? The failure to do so can disqualify the plan or make a costly correction. To identify and respond to those issues, plan sponsors need help from their advisors.

Plan sponsors face another important coverage issue–how to educate the employees about the plan, the importance of making deferrals into the plan, and the 401(k) investment alternatives.

Without participation by the lower-level employees (or substantial contributions by the employer), the principals of the company sponsor will be limited in their ability to defer, and the value of the plan will be diminished.

What are the tasks?

Who is responsible for ensuring that “excess” amounts are not being contributed? That is, amounts that violate the 415 limits on allocations, the 401(a)(17) limits on compensation, the 402(g) limits on deferrals, and the ADP and ACP limits on deferrals and matches for highly compensated employees? And, if excess amounts are contributed, who decides on the best correction method? How is that decision made?

Who determines employee eligibility? How are plan corrections made?
What are the specific criteria for a hardship withdrawal? What steps must the company take to comply with the qualification rules in approving a hardship request?

A plan sponsor should be able to rely on its administration firm to do most of this work and to provide advice to the employer on the decisions it must make.

Employee participation is a function of thoughtful plan design, good communication, quality investments, and effective face-to-face enrollment meetings. The plan fiduciaries should work with their advisors to ensure the employees are given clear and thorough explanations of the requirements to participate, the importance of deferring, and the basics of investing.

A cash balance plan is a specialized retirement program that allows business owners to set up a tax-efficient savings program for their employees. Cash balance plans generally credit participant accounts each year with the pay credit and interest, depending on the type of investment and employer, which is usually a fixed rate between four and five percent, or an index such as the 30-year treasury bill yield.

The amounts that can be contributed are subject to a complex non-discrimination test. In other words, if a participant’s compensation is more than the average wage of the industry, his or her contributions will be more than four times the amount that employees earn, or less.

Communication practices

Communication is a critical aspect of the whole retirement management process. When choosing a TPA for defined benefit plans, make sure to communicate your requirements, financials, and expectations with the selected candidate or prospects.

Defined benefit plan rules follow a sophisticated reporting, administration, and compliance structure. It’s quite common for employers to be unaware of these intricacies.

It is the responsibility of the TPA to ask the right questions, seek relevant information for filings, and keep involved members in the loop throughout the plan.

Additionally, TPA should maintain proper communication with the employers and employees regarding important contribution deadlines, filings, distribution, or critical plan milestones. Your TPA should work to maximize the financial benefits for you as well as your employees.

You will form a very close relationship with your TPA. They make sure your plan is compliant.

Bottom Line

A cash balance plan administration cost is usually borne by the plan sponsor, as the plan sponsor is liable for the value of the assets used to make benefits payments. A cash balance plan can be a useful retirement vehicle for business owners, because the business is not exposed to the risk of the plan losing value because the investments in the fund are not liquid. However, cash balance plans can be accessed before retirement and are particularly useful for entrepreneurs.

Employers’ administrative and investment duties and their fiduciaries are numerous and complex. The failure to comply with ERISA’s rules can result in penalties, government audits, and even liability. Fortunately, with help from advisors, ERISA can be a map to compliance rather than a trap for the unwary.

Paul Sundin

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