How Cash Balance Plans Work

Setting Objectives for Cash Balance Plans

A Cash Balance Plan is a type of Defined Benefit plan that’s a proven retirement savings strategy for owners of successful businesses with steady revenue. Small business owners can catch up on retirement and lower tax liability with a high-contribution retirement plan – minimizing taxes is one of the top advantages of the plans. Cash Balance plans are part of a group of plans called “qualified plans” that are IRS-approved and allow high tax-deductible contributions. For many successful business owners, the contribution limits of a 401(k) may not be enough to reach retirement  goals, but adding a Cash Balance Plan can help achieve these goals. Unlike 401(k)s, employers — not employees —  make contributions to the retirement  plan

A self-employed individual can set up a Cash Balance plan as long as there is significant money to contribute to the retirement plan.

Business owners establish the Cash Balance plan and set a contribution amount they want to fund each year, within limits set by the IRS and calculated for them by third party administrator Dedicated Defined Benefit Services. Additionally, owners may be able to set different contribution rates based on employee classifications. The Cash Balance plan is designed in tandem with a Safe Harbor 401(k)/Profit Sharing plan. By combining plans, contributions by the owner on behalf of employees to both the Cash Balance and the 401(k)/Profit Sharing plans are limited but sufficient to provide adequate benefits to pass IRS nondiscrimination and other compliance testing.

An “interest credit” is also set in the plan design stage, and this is credited to owner and employee accounts annually. We use a fixed interest rate of 3%. When choosing investments for the account, it is recommended to select non-volatile investments that can match the set interest credit.

Contributions to the plans are required annually. Our plan administrators calculate the required contributions for the plan and the profit sharing plan to ensure that the retirement program complies with all applicable laws and regulations. In subsequent years, investment performance is a key factor in determining the contribution amounts.

  • Key Considerations for a Cash Balance Plan

  • Investments Accounts for Cash Balance Plans

  • Investment Accounts for 401(k) Plans

Getting Started

  • Retirement Plan Illustration Request Form

    Request an Illustration to estimate business contribution and tax savings

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  • Contact Us

    Give us a call at 866-269-2706 to discuss your situation

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  • Weekly Cash Balance Plan Webinar

    Sign up for an online demo on cash balance plans

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