Our cash balance plan calculator provides an estimate of how much you can contribute based on your age. Just set the toggle to your age and our calculator will give you estimated contributions. It’s quick and simple!
How much can you contribute?
A few words about the calculator
- The cash balance plan calculator is meant solely for illustrative purposes. It is intended to be an estimate and final funding is determined by our actuary.
- Our calculator is intended to be a year one estimate. Subsequent to year one, there are several factors that will impact annual contribution levels.
- The funding is meant for an owner-only or solo plan. If you have employees, you must get a custom illustration. If we receive an employee census we can provide a custom solution for you to review. The goal is to examine the maximum contributions that can be allocated to the business owner. From there, we can estimate contributions for employees and provide various strategies to maximize owner contributions.
- You may add a 401(k) plan to a cash balance plan. You can contribute to the employee deferral with no limitation. However, any profit sharing contribution will be restricted to a maximum of 6% of your W2 compensation (if a corporation) or your “deemed” wage if you are taxed as a sole proprietor or partnership.
- The calculator assumes that your business has been operating for a minimum of three years. However, if your company has been operating for a shorter time period, you should have maximum compensation. If your compensation is less than the maximum, your funding will be reduced.
- If you have been operating for a few years, you can often get your year one funding higher with a “past” or “prior” service contribution. If you desire a larger contribution make sure to reach out to us.
The cash balance plan definition
With the increasing popularity of cash balance plans, there is often misinformation. So we decided to take a look at the cash balance plan basics and look at the true definition of what a cash balance plan actually is.
When we examine the cash balance plan rules, we can understand the complexities. So let’s try to just look at some of the basics and determine if a plan is right for you and your business.
Many people understand what a 401(k) plan is. It is a form of plan called a defined contribution plan. You put in a certain amount each year. It grows based on contributions and earnings. Then when you retire you have access to whatever the account balance is. It sounds very simple.
But a cash balance plan is a little different. It is a defined benefit plan. It promises an employee a contribution equal to a percent of each year’s earnings and a rate of return on that contribution. The benefit is always expressed as a total account balance.
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This is in contrast to a traditional defined benefit plan, which typically promises an employee a flat dollar amount based on years of service or an annuity—a periodic benefit usually based on years of service and an employee’s earnings in the years closest to retirement.
But cash balance plans by definition work much like a defined contribution plans because an account balance is maintained for each participant. The plan provides for a specified accrual (as a percentage of pay) and a specified rate of investment earnings to be credited to the account each year. It is for this reason that they are often called hybrid retirement plans.
Cash balance plan calculator: So what are the benefits?
There are many benefits to implementing a cash balance plan and the first is structure. Under the traditional pension plan, companies have to maintain an account with enough funds to pay individuals out indefinitely. This has lead to underfunded pensions or pensions that were used as a rainy day fund.
With the structure of a cash balance plan, the company contributes funds into a participants account and that’s it. The company no longer needs to maintain the funds in a separate account for future payout. This frees up cash flow for future expansion and growth.
It is important to note that there is not actually a cash account in existence for each participant. Hypothetical retirement accounts define an employee’s accrued benefit at any point in time. The account is merely a record-keeping feature.
By definition, cash balance plans require the use of actuaries. Traditional defined benefit plans use actuaries as well. The amount the employer contributes to the plan each year is based on actuarial assumptions.
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Tax benefits are a driving reason companies look into certain retirement plans and a cash balance plan is no different. Each business structure is different, but a cash balance plan by definition allows your company to a tax deduction for amounts contributed. With those savings, the company can use those extra dollars to fund parts of the cash balance plan. The benefit to that is it can be partially self-sustaining.
It is important to speak with your accountant because depending on if you are an S-Corp or C-Corp, it could have an impact on your tax savings. Also, be sure to run tests and analysis on the plan to determine feasibility.
Funding Guidelines
Contributions are determined by a formula specified within the plan document. It is often a percentage of pay or even a flat dollar amount. Take a look at the table below and you can see amounts that can be contributed for Cash Balance Plans and 401k plans. In practice, the amounts below will vary depending on annual compensation:
So now that you understand the basics, let’s take a look at some of the specific details. You may be familiar with a retirement vehicle often offered by employers called a pension plan. A pension plan is a vehicle designated for retirement that your employer would offer qualified employees, guaranteeing them a certain amount of income per month upon retirement.
Cash balance pension plan contribution limits are much higher than most other defined benefit plans. The contribution limits are dependent upon the employees age. The older the employee is, the more they are able to contribute. The younger the employee, the less they are able to contribute.
So let’s look at an example
For example: employer XYZ provides a cash balance plan that credits all employees’ accounts with 6 percent of their annual salary. In addition, these accounts are credited with 5 percent interest, which is paid by the employer on an annual basis.
This method of benefit accrual allows cash balance benefits to grow more evenly over an employee’s career than would occur under a final average pay plan in which the majority of benefit accrual takes place in the final few years prior to retirement. In other words, benefits for cash balance plans are determined by an employee’s pay averaged over his or her total years of service.
Hopefully, you now understand the cash balance plan basics. But the details are what is really important. Make sure you run some scenarios with a qualified TPA (often called a third-party administrator). Only then can you determine if a plan is right for you.
Pensions are a commodity today that everyone loves to have, since defined contribution plans like 401k’s are more popular. Plans like 401k’s means that the employee (participant) needs to contribute to the plan. Defined benefit plans such as Cash Balance Plans are employer paid. What exactly are Cash Balance Plans, and how can they help you retire?
A cash balance pension is funded by the employer with a set percentage of the employee’s annual compensation, plus typically interest as well. Once again, a Cash Balance Plan is a defined benefit plan, meaning the responsibility to fund is on the employer.
As you can see by the characteristics of a Cash Balance pension plan, it is a popular plan today, giving you the best of a defined contribution plan, and a defined benefit plan. At Emparion, we pride ourselves on giving you the best information possible to create your own, IRS approved Cash Balance pension plan. You can find out more here at no obligation.
Final thoughts
Many business owners who want to take money out simply terminate the plan. But remember, these plans are meant to be permanent so be careful.
Like a pension plan, a cash balance plan is a retirement vehicle offered by employers to qualified employees of a company. The employer contributes a set percentage of the employee’s yearly compensation plus an interest credit to an account designated for the employee’s retirement.
They also have an option to take a lump sum benefit, subject to their spouses’ consent, which is equal to their account balance, which is $100,000. The lump sum amount can be rolled over into an Individual Retirement Account (IRA) or to another employer’s cash balance plan if the employee gets employed somewhere else.