Understanding how cash balance plans work can be very challenging. The more employees you have, the more complex the plan administration will be.
Cash balance plans are qualified plans. This means that you must follow IRS rules and make contributions for eligible participants.
In this guide, we will talk about some of the eligibility criteria. We will also offer up some strategies you can consider if you’re looking to minimize employee contributions. Let’s jump in.
Standard Plan Options
- 21 years of age, One Year of Service, and 1,000 hours must be earned yearly.
- The cash balance plan vesting schedule would be 3-year cliff vesting.
Most Restrictive Entry
- 21 years old, two years of service, 1,000 hours must be earned yearly.
- The cash balance plan assets would need to be immediately vested.
Minimum Coverage Requirements
- The DB plan can exclude up to 60% of eligible participants
- Consider hiring your spouse to help with the required coverage rule.
Strategies Available
- Hire younger employees.
- Consider short-term employment arrangements. If your staff has a lot of turnover, they may not fully vest after entering the plan and would forfeit assets upon termination.
- Consider part-time employees
- Utilize 1099 contractors where appropriate.
- Implement 2-year eligibility.
- We recommend hiring at the end of 2025 for maximum flexibility; the DB plan has two entry dates, 1/1 and 7/1. If you hire employees after 7/1, the next available entry date would be 1/1, delaying their entry into the plan.
- Freeze the DB plan before employees meet eligibility requirements.
401(K) Plan Considerations:
- We highly recommend reviewing eligibility for the 401(k) plan with the current 401(k) administrator.
- Be aware of LTPT (Long-Term Part-Time) rules. You can also discuss these in more depth with your 401(k) administrator.
Secondary Company
- A group of shared ownership companies is treated as a single employer under IRS rules, also known as a Control Group.
- Companies with a service relationship and, in some cases, an ownership relationship are considered Affiliated Service Groups (ASG).
- Opening a secondary company and including employees on that payroll would not immediately exempt those employees from participating in your current plan.
