Deferred Election Cash Balance Plan: What is the Deadline?


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You know we are huge fans of retirement strategies. More specifically, the cash balance plan is our #1 tax deferral strategy. But what is the deferred election date?

Thanks to recent tax reform provisions, the deadline to set up a plan is now the due date of the tax return. In this post, we will show you how the deadline works and discuss the deferred election.

What is the deadline to set up a cash balance plan?

The plan must be established by the tax-filing deadline for a given year (including extensions). For example, if a business has a fiscal year that ends on December 31, 2023, and requests a tax-filing extension for its 2023 tax return, the deadline to establish a cash balance plan for the 2023 tax year would be the extension deadline, which is typically September 15, 2024, for calendar-year businesses.

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Realize though that the latest date to set up and fund a plan is 8 1/2 months after the year-end. So even if you are a sole proprietor with a tax filing deadline of October 15th, you still must set up and fund the plan by Sept 15th.

It’s important to note that while the deadline for establishing a cash balance plan may be at the tax-filing deadline, it’s usually best to start the process well in advance to ensure that all necessary paperwork and filings can be completed in time.

Cash balance plans have become popular among employers in recent years for a few reasons:

  1. Predictable retirement benefits: Cash balance plans provide employees with a predictable retirement benefit typically based on a percentage of their salary guaranteed by the employer. This can appeal to employees looking for a retirement benefit that is not subject to market volatility, like a 401(k) plan.
  2. Flexibility: Cash balance plans are flexible regarding contributions, which can benefit employers who want to vary their contributions yearly. This can be especially helpful for businesses with fluctuating profits or cash flow.
  3. Higher contribution limits: Cash balance plans allow for higher contribution limits than other retirement plans, such as a traditional 401(k) plan. This means that employees can save more money for retirement each year, which can be particularly appealing to higher-earning employees who may be unable to contribute the maximum amount to a 401(k) plan due to contribution limits.
  4. Tax advantages: Like other qualified retirement plans, cash balance plans offer tax advantages to both employers and employees. Employer contributions are tax-deductible, and employee contributions grow tax-deferred until they are withdrawn at retirement.

Cash balance plans offer many benefits for employers and employees, contributing to their growing popularity in recent years. Thanks to the extension of the deferred election date, companies have plenty of time to set up a plan.

Benefits of a Cash Balance Plan

Cash balance plans share many benefits as defined contribution plans such as 401(k)s. These plans offer flexibility regarding investment options and are easy to understand. Employer contributions to cash balance plans are often discretionary, which means they can be adjusted based on the company’s needs. 

Cash balance plans are also portable, transferring them to new employers. Cash balance plans can offer higher employer contributions than traditional defined benefit plans. This can make them more appealing to employees and help recruit new talent. Employers can also take advantage of the fact that cash balance plans are primarily defined contribution plans to reduce costs.

Deferred Election Cash Balance Plan Deadline

The deferred election date has been beneficial for businesses setting up plans. In fact, many companies can go through the tax season process and then decide whether or not they’ll set up a plan depending on their tax situation.

But be careful with this approach. Remember that cash balance plans are qualified plans. As such, there are discrimination testing and funding guidelines. If the profit-sharing contribution has been maximized, this may negate the ability to set up a cash balance plan.

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As a result, companies need to do tax planning upfront with CPAs and financial advisors to ensure they don’t run into funding issues with the plans.

In addition, you should set up a plan a month before your tax filing date. It typically takes 1 to 2 weeks to set up a plan, and it can take about the same time to set up the investment account and make the final contribution.

It certainly can be done quicker. But the key thing to remember is not to wait until the last minute. You may run out of time to get it all done.

Plan AdvantagesPlan Disadvantages
Tax-Deferred GrowthComplex Design
Rollover to IRA or 401(k)Mandatory Funding Level
Flexible Contributions RangePermanency Rules
Full Tax DeductionsHigh Admin Costs

How your age impacts your cash balance plan contributions

Age can impact cash balance plan contributions in many ways. A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s. In a cash balance plan, the employer contributes a fixed amount, or “cash balance,” to an account for each employee, earning a guaranteed return rate.

The retirement benefits provided under a cash balance plan are generally based on the employee’s account balance at retirement. Employees who start contributing to the plan at a younger age may have a higher account balance at retirement due to the longer period for their contributions to accrue.

Final Thoughts

Cash balance plans are defined benefit plans that many employers choose to implement. These plans are a hybrid of defined benefit and defined contribution plans, offering some advantages of both. Consider a cash balance plan if you want a retirement savings plan. But it would help if you understood the pros and cons of such plans to make an informed decision.

Paul Sundin

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