Top 10 Questions CPAs & Financial Advisors Ask About Cash Balance Plans

With rising tax rates, high-income business owners always look for ways to lower their tax liability while increasing retirement savings. CPAs and financial advisors have an excellent opportunity to stand out from other advisors by discussing the tax-reduction power of cash balance plans. 

But these plans can be complex and potential clients will have many questions. This is why initial client discussions are critical.

When advisors understand the answers to the top 10 questions, they will open the door to new clients and add tremendous value to their existing clients.

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1) What is the best way to get business owners interested in cash Balance plans?

Cash balance plans are typically used for tax deferral and planning purposes. A good intro question is, “How much would you like to contribute to retirement if you can get a full tax deduction?” is the best opener. 

2) Is there an ideal ratio between owners and non-owner employees where a plan makes sense?

It depends. Most plans with over ten employees will only make economic sense if the owner considers the plan an employee fringe benefit. However, higher employee ratios make sense if the required employee contribution is regarded as a fringe benefit and the business owner has a high tax rate. 

3) Why are plan contributions so large for those 50 and older?

Cash balance plan contributions are generally driven by age and W2 compensation. So, the older you are and the higher your compensation, the more you can get into a plan. People aged 50 generally have fewer years until retirement. Therefore, they are able to make higher contributions to meet their defined benefit.

4) Do all employees need to be included in the cash balance plan? What criteria can be used for selection?

No, you do not need to include all employees in the cash balance plan. The lower of 40% of eligible employees, or 50 total eligible employees, must be included in the plan. However, if there are only two eligible employees, they must both be included. Solo or owner-only plans are acceptable. The company can choose to include employees by job class or another criteria depending on their business goals.

5) Does a cash balance plan combined with a 401(k) Profit-Sharing plan require a minimum of 7.5% of pay for all eligible employees?

No. As a general rule, the profit sharing will range from 5% to 7.5% of pay as a required company contribution to the 401(k) profit-sharing plan. This does not include a safe harbor match. Typically, when only 5% of pay is contributed, it can limit the cash balance contribution for the owners.

6) What’s the best advertising or marketing guide for selling a cash balance plan?

A plan illustration is the more critical selling point. It lays out the proposed contribution amounts in a simple format. It also illustrates the tax savings. The elements show the retirement savings for the owners and an estimated staff cost. Learning how to explain the illustration to a prospect is imperative to selling the plan. 

7) What concerns should a business owner have regarding over and underfunding a cash balance plan?

Funded status is an essential but manageable concern. Over the last 10 to 15 years, the IRS rules have increased the funding range for annual contributions from “Minimum required” to “Maximum deductible.” This allows business owners more lenience to manage funding levels yearly. There are a variety of strategies to help manage clients through good and bad times, along with helping them when plans become overfunded during bull markets.

8) How many years must a business owner commit to a cash balance plan?

The IRS has not stated a specific number of years. However, the plan should have long-term intent and a level of permanency. If terminated, there needs to be a good business reason for doing so. In general, ten or more years is preferable to lower the likelihood of IRS scrutiny about the overall intention of the cash balance plan.

9) Why do businesses strategically terminate a cash balance plan?

Companies usually can terminate a plan for a business reason, such as not needing the plan anymore, having a low business net income, or lowering the company’s liability. Business owners may also terminate a cash balance plan that’s been around for many years (usually ten-plus years) to allow the retirement benefits to be distributed. It also provides an opportunity to set up a successor plan that may be better suited to the company’s overall changing demographics.

10) When is a cash balance plan a bad idea?

A cash balance plan will often not work if there are wide swings in net income. Also, it makes sense if there is certainty regarding how long the business will be open or when there are a lot of employees. Typically, the plans are more compelling when the total staff cost is lower than the income tax rate paid by the business owners.

Paul Sundin

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