Self-Directed Cash Balance Plan: Can You Do It?

By now you may already know about the basics of cash balance plans. But have you ever heard of self-directed cash balance plans? Can you actually do it?

The good news is…yes you can do it. But there are additional rules and requirements that must be followed. This makes the compliance very challenging.

In this article, we’ll discuss the compliance issues. We’ll also point out a few pitfalls that you should avoid. Let’s dive in!

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How to use a self-directed cash balance plan

Before we move any further, let’s clarify that this strategy works best for owner-only businesses, having your spouse as an employee is okay. If you have employees that qualify for benefits, this plan might be a little challenging to execute.

Brokerage AssetsSelf-Directed Assets
Index FundsHard Money Lending
Certificates of Deposit (CDs)Real Estate
Bonds & Bond FundsPrivate Stock
Mutual Funds & ETFsBitcoin & Cryptocurrency

Now that we have clarified this intricacy let’s have a look at the compliance necessary for our strategy.

Bonding Requirements

Under ERISA rules, if the cash balance plan run by a company is subject to ERISA, the company must have a fidelity bond covering at least 10% of the net qualified plan assets. The bond requirements might vary between $1,000 and $500,000.

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However, in case of plans with fewer than 100 employees, the DOL waives audit requirements if:

  • The plan derives less than 5% of its net value from “non-qualifying assets.”
  • The plan possesses a fidelity bond that covers 100% of the value of the non-qualifying assets of the plan.

Pro Tip: Don’t let bonding scare you. They are cheap and won’t burn holes in your pockets.

Form 5500 Requirements

In most of the cases, ERISA doesn’t cover 1-person plans, so you will be fine with filing only Form 5500-EZ. However, if your plan holds non-qualifying assets, you are required to submit Form 5500. Since there is no ‘one-participant plan’ election in the form, your plan will qualify as a single-employer plan, thereby triggering bonding requirements. Your tax compliance will be increased.

Annual Valuation

Since cash balance plans require actuarial calculations annually, your TPA will need to know the fair market value of the property. The fair market value of the investment should be sufficient to pay benefits, and if it falls short, you will have to make additional contributions.

Finding the annual valuation of the investment is critical for compliance, so it is best to hire a third-party appraiser for the job. Make sure that the appraiser doesn’t have any existing relationship with the fiduciaries of the plan or the plan itself.

What types of assets can I have in my cash balance plan

  • Real estate. This is the #1 desired investment in a self-directed plan. Valuation and financing can often be a challenge.
  • Gold and precious metals. Precious metals in retirement account was very popular a few years back. Many people still consider it a great investment even considering the volatility.
  • Commercial notes and real estate mortgages. Buying second mortgages or non-performing mortgages is another favorite of many retirement plans. This can be risky, but the interest income that is generated would generally not be considered UBIT.
  • Cryptocurrency and bitcoin. I certainly would not recommend bitcoin in a cash balance plan because it is so volatile. You want to try to get a consistent return approximating your interest crediting rate.
  • Partnerships and private placements. These investments will often generate a K1 that will be in the name of the cash balance plan. They can offer good returns, but can have some UBIT problems. Make sure you discuss with your CPA.

The takeaway line on self-directed cash balance plans

Now that you understand the process of investing in real estate using a cash balance plan, you’re ready to boost your retirement savings with this strategy. However, you have to be compliant and prepared to handle the regulatory aspect of a cash balance plan for smooth completion.

Paul Sundin

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