At Emparion, we understand that cash balance plans and defined benefit plans can be challenging to understand. For this reason, we have summarized some of the key provisions and issues you should consider before setting up a plan.
Table of contents
Defined Benefit Plan Details & Assumptions
A cash balance plan is a type of defined benefit plan. Defined benefit plans are qualified retirement plans and an IRS approved tax deferral. Our plans will be structured to include the following:
Variable annual contributions
We generally fix first-year contributions based on your desired funding level. But with each successive plan year you are given a funding range. This range includes a minimum, maximum and a target contribution amount.
You are allowed to fund within the range, but the goal is to stay close to the target. Do NOT contribute to your plan until we give you a final contribution range. You have eight and a half months after the plan year-end or until you file your income tax return (whichever is earlier) to make plan contributions. For a December 31st year-end, the deadline is September 15th.
The plan can be amended
You can always amend your plan to increase contributions. However, you cannot amend your plan to decrease contributions once employees have become eligible for a current year benefit.
You can combine with a 401(k)
Your defined benefit plan can be combined with a 401(k) profit-sharing plan. However, profit sharing contributions are limited to 6% compared to the normal 25%. This provides you with additional retirement funding. 401(k) contributions are typically elective. This provides you with additional contribution flexibility.
Distribution options
When the plan is terminated, you are allowed to rollover the plan assets into an IRA account or another qualified retirement plan. This is a tax-free rollover. You are not taxed until the assets are withdrawn from the retirement account. The IRS also imposes certain limitations and restrictions on distributions.
Plan termination
These are “permanent” plans. You do not have to have them open for the life of the company. However, you should plan on having the plan for at least several years.
You can terminate your plan with reasonable cause. Depending on plan assets, you may be required to make a contribution in the year of termination.
Our role in the process
Emparion is a third-party administrator (TPA). We are not your CPA and we do not give financial advice. We encourage you to seek the help of tax, legal and financial professionals before establishing a plan. We can participate in conference calls with your advisors as requested.
Defined Benefit Plan Risks & Responsibilities
While a defined benefit plan can provide you with large retirement contributions along with tax deferrals, there are specific plan risks you need to be aware of. We can discuss these items with you during our welcome call. Below are a few of the issues you should consider:
Plan contributions are NOT elective
These plans have mandatory contributions. As such, you will typically have to make required annual contributions until the plan is terminated. This can be a challenge for businesses with revenue volatility. If your company is subject to wide income swings, make sure you raise the issue with us so we can make sure a defined benefit plan is the best option for you.
Plan is permanent
The IRS requires defined benefit plans to be permanent. But this does not mean you have to have it forever. The IRS allows plans to be terminated with reasonable cause. If permanency is a concern of yours please discuss the issue with us.
Limitations when combining with 401(k) plans
Even though the IRS allows defined benefit plans to be combined with 401(k) plans, there are certain limitations and restrictions. Profit-sharing contributions are limited to 6% of compensation (or “deemed” wage for a sole proprietor) as opposed to the traditional 25%.
Restrictions on combining with other retirement plans
As discussed, a defined benefit plan has limitations and restrictions when combining plans. Most SEPs cannot be combined with defined benefit plans. If you are considering setting up a defined benefit plan, you should stop contributing to any other retirement structure until you make a decision. Generally, excess contributions to other retirement plans can be reclassified or recharacterized.
Be careful of funding levels
Your defined benefit plan will have a stated interest crediting rate. This is normally 5%. In general, you should plan for an investment asset return consistent with your interest crediting rate.
Should your plan assets grow faster than the rate, it will reduce future contributions. Likewise, if your plan assets earn substantially less, future year contributions will tend to increase. Tax penalties can occur if your account becomes severely under or over funded.
Communicate regularly with us
We gather information annually regarding your compensation, business profit or loss, and plan assets. This data is necessary for providing you with accurate funding ranges, filing required IRS returns and to ensure your plan is running smoothly.
Make sure you communicate any business changes you have as soon as possible. If you want to increase or decrease annual funding or to terminate the plan, we want to know as soon as possible.
Next Steps
Step 1: Review your illustration with your CPA and financial advisor
Our illustration provides you with an estimate of your annual contribution amounts. Please review the illustration and pricing table with your CPA and financial advisor.
If you are seeking higher or lower contributions, please let us know and we can customize the plan for you. Please consider whether you want to add a 401(k) plan for greater contributions and flexibility. Feel free to schedule a call with us to consider your options.
Step 2: Complete our online set-up questionnaire
Included with illustration was a link to our online new plan set-up questionnaire. You can also find it here: https://www.emparion.com/new-plan-set-up-checklist/. Once you decide to proceed with the plan, just complete and submit the online questionnaire.
Step 3: Plan adoption
Once we receive your completed online set up form, we will be in touch with any questions. Our normal processing time is 5 business days to draft all plan documents. We will deliver to you the final plan documents and signature pages. One you sign your documents your plan is legal.
You will then receive a request to schedule a 30-minute onboarding call. In that call, we can answer any remaining questions you have and clarify terms of the plan.
Step 4: Open your investment account
The next step is to open your investment account. We recommend that you fund no more than 50% of your estimated contribution amount until final contributions are calculated.
Contact Us
Should you have any questions or concerns, please contact your Emparion advisor.