Cash Balance Plans | What should advisors know?

If you have any questions regarding the content of this webinar view our Q&A section below or reach out to Wendy Frame or Jeremy Palm.

Q: If there is an asset short fall at the end of the year, does the employer need to make up the shortfall in the next year’s contribution or how long do they have to make up that shortfall?

A: The shortfall will be amortized over 7 years, therefore, the business owner does not need to make up the shortfall all at one time.

Q: If the plan is crediting interest at 4%, what if the employer wants to be more aggressive than 4%. Can they have a higher crediting interest rate? Or, can they invest the plan assets more aggressively? Are there any limitations the employer should be aware of?

A: The highest interest crediting rate, from a flat interest crediting rate perspective, is 6%. When dealing with an ‘owner-only’ type situation, it may be appropriate for the business owner to use a flat 5% or 6% interest crediting rate. ‘Owner-only’ situations have more flexibility which allows them to select a higher interest crediting rate for their plan if they want to be more aggressive.

In a tested plan situation, if the plan document indicates using a higher interest crediting rate, this may cause the business owner to contribute more to their employees to pass testing. Overall, this rate is specific to each plan so during the design process our team will review and provide recommendations for the best interest credit rating will be for the employer.

There are no limitations on the aggressiveness of the portfolio that the employer is establishing. However, the contributions may fluctuate from year to year if the assets are invested to aggressively. We would want to make sure your financial advisor is included in the conversations regarding your plan to make sure the investments are invested properly.

Q: Is it too late to set up a cash balance plan and take a deduction for 2018?  

A: Yes, it is too late to set up a cash balance plan and take a deduction for 2018. The plan document should have been signed by December 31, 2018 to be qualified for the 2018 tax deduction.

Q: Can you have a cash balance plan without a 401k in place?

A: The short answer is you can have a Cash Balance Plan without having a 401(k) Plan in place. This typically only works if we are setting up a Cash Balance Plan for a business owner who has no employees. It works for this “owner only” situation because we do not have to pass nondiscrimination testing.

Let’s assume we are working with a business owner who has employees. Let’s also assume the business owner does not currently sponsor any type of retirement plan. If the business owner wants to set up a Cash Balance Plan this year, then the business owner will also want to set up a 401(k) Plan. When we prepare the retirement plan design, the goal is to:

  1. Maximize what the owner gets in the plans.
  2. Minimize what the owner has to contribute to the employees to pass nondiscrimination testing. The cheapest way to maximize what the owner gets is to have a 401(k) Plan and a Cash Balance Plan.

Q: How flexible are the year to year contribution amounts for a Cash Balance Plan?

A: There is a contribution range (minimum required contribution versus maximum deductible contribution) that we calculate in the actuarial valuation report every year. Business owners can contribute more to the CB plan in the good years and less in the bad years, but they do want to meet that minimum required contribution amount every year to avoid paying excise taxes.

Q: Does the plan establish the planned contribution levels at the beginning of the plan or is it flexible every year?

A: A Cash Balance Plan is a specific type of Defined Benefit Plan. When the Cash Balance Plan is established, the benefit is defined in the plan document. The benefits participants earn in the Cash Balance Plan determine the contribution levels. In the plan design process, we want to make sure the business owner is comfortable with these contribution amounts.

Note: the Cash Balance Plan can be amended to stop new benefits from being earned which will reduce the contributions that need to be made.



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