How Long Do You Have to Keep a Cash Balance Plan? Permanency Rules

Cash balance plans are one of the best retirement structures in the marketplace. But how much do you know about the IRS permanency rules? Also, how long do you have to keep a cash balance plan?

Many people get excited about setting up a cash balance plan. But then they hear that they are supposed to be “permanent” plans. This will scare some people off.

In this article, we will discuss how long do you have to fund a cash balance plan. It might not be as long as you think. Let’s jump in!

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Now that we discussed the basics let’s point out some details. You might know of a retirement vehicle called a “pension” plan.

A pension plan is a retirement structure that a company could provide to eligible employees. It will typically guarantee them a specific monthly benefit upon retirement.

Cash balance plans are a type of defined benefit pension plan that are designed to provide retirement income for employees. There is no set time frame for how long you have to keep a cash balance plan, as the length of time you participate in the plan will depend on your individual circumstances and the plan structure.

In general, cash balance plans are intended to provide retirement income for employees, so it is likely that you will participate in the plan until you reach retirement age. However, cash balance plans are portable, which means that you can take the plan with you if you change jobs.

If you leave your job before reaching retirement age, you may be able to roll over your cash balance plan into a new employer’s plan or into an individual retirement account (IRA). The decision is based on your tax planning strategy.

How long do you have to keep a cash balance plan?

The IRS does not say specifically how long you have to have a cash balance plan open. However, they say you need to open it for at least several years. They have yet to define what several means, but most people interpret it as 3 to 5 years.

The IRS did not establish a safe harbor or specific threshold for a period of time. However, the key to understanding is that these are permanent plans with long-term intent. You don’t have to have the plan open forever, but you should plan on having it open indefinitely.

How long do you have to keep a cash balance plan?

So, if you have a plan for 3 to 5 years and terminate with reasonable cause, you’re probably fine. But sometimes, you never know with the IRS.

The important point to remember is to consider this as part of your long-term retirement and benefits strategy and make mandatory contributions each year.

IRS permanency rules

Our average client has the plans for around seven years. But this statistic can be deceiving.

Many clients set up plans as they get very close to retirement. As such, they may be looking to retire in 5 to 10 years, so that the seven-year average might sound reasonable.

But one vital point to note regarding the length of a plan is that to meet the lifetime limit of around $3 million, you must have a plan open and funded for at least ten years. If the plan is not established for that long, you must prorate the lifetime limit over these ten years.

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As a result of the tenure rule, some clients can see themselves maxing out sooner than ten years. However, most clients will only have a problem with the lifetime limit if they have very high compensation and have been aggressively funding and investing the plan assets. There are many different criteria you need to consider when determining how long you have to keep a cash balance plan.

Who are great candidates?

Here are some great candidates for cash balance plans:

  • Professionals and entrepreneurs: Cash balance plans can help professionals and entrepreneurs save more for retirement.
  • Business owners: Cash balance plans can help business owners attract and retain top talent.
  • Sole proprietors: Cash balance plans can help sole proprietors save more for retirement.
  • High-income earners: Cash balance plans can help high-income earners save more for retirement.
  • Businesses with consistent profits: Cash balance plans are a good fit for businesses with consistent profits.
  • Businesses with a stable workforce: Cash balance plans are a good fit for businesses with a stable workforce.

If you are considering a cash balance plan, it is important to review with a financial advisor to determine if it is right for your business.

How long do you have to fund a cash balance plan?

A 401(k) is an elective plan. As such, you’re not required to fund the plan yearly, but you can add the contribution in when you want a higher overall retirement level. You can also take the deferral and the profit-sharing off if you think your cash flow is light this year.

But we know that sometimes life can get in the way of our intentions. If your business changes, dissolves, or you have other retirement structuring plans, you typically can terminate a cash balance plan and roll it over into an IRA.

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As long as you approach the plan as it is permanent in nature, you will most likely be fine. We can discuss any concerns you might have regarding the plan, permanency, and how long you have to keep a cash balance plan open.

It is important to carefully review the terms of your cash balance plan to understand your options for participating in the plan and to make informed decisions about your retirement savings. If you have any questions about your cash balance plan or your retirement savings options, it is a good idea to speak with a financial advisor or a retirement specialist.

Final thoughts

An integrated plan will reward those with high compensation more than a nonintegrated plan. The integration level is intended to compensate for the skew of Social Security benefits favoring the lower-paid.

Let’s say you want to compare a 1% of the final average pay plan versus an integrated 1% of the pay plan, which provides an extra benefit above a certain compensation level. The benefits of the integrated plan will be higher for those with more significant compensation.

In other instances, it needs to be more obvious which benefit formulas being compared will benefit which groups of employees the most. For example, comparing a benefit formula based on compensation to one based on flat dollar amounts is more complicated. In the small plan market, flat dollar plans (for example, $25 per month per year of service) are rare. However, they are often used in plans covering union employees who are paid hourly.

Paul Sundin

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