Defined Benefit and Cash Balance plans require services of an actuary, typically provided through a TPA. And, if the balances in a 401(k) account or the combined balances of a DB and a 401(k) exceed $250,000, the services of a TPA are highly recommended to maintain compliance with legal requirements and administration.
The Craft of Plan Design
A strong plan design will build in flexibility so the plan can continue to work for the business owner over time. Because we specialize in Defined Benefit and Cash Balance plans, we have worked on plans for just about every client business situation. The design process begins with a discussion about what the owner wants to contribute for themselves each year.
Taking into account numerous factors including eligible compensation, age, years of employment, and actuarial formulas, we can calculate what the maximum annual contribution could be, within IRS limits. Cash flow is another critical consideration. If a business owner plans to make large purchases in the next couple of years, a lower required contribution might better meet a client’s needs.
Plan design must consider all employees and determine who needs to be included in the plans. Service requirements and different vesting schedules can be used to limit eligibility of participants. And, with Cash Balance plans, the business owner can designate certain classes of participants or even individuals who might receive favored treatment. Plan design includes combining plans to meet the client’s objectives.
Both the Defined Benefit and the Cash Balance plans can be combined with 401(k)s. An owner-only business could use a OnePerson(k) to increase the total contribution and for additional flexibility. Businesses with employees would use the OwnersPlus program which combines a Cash Balance plan with a Safe Harbor 401(k)/Profit Sharing plan to better manage and allocate the contributions required for employees.
A well-crafted plan design will take into account anticipated changes to the business so that the plan can be stable over the next 3-5 years. And, in all cases, the plans will be designed to pass IRS non-discrimination tests.