Cash Balance Plans. When participants terminate employment, they are eligible to receive the vested portion of their account balance.

Transcription

1 Cash Balance Plans January 1, 2014 Cash Balance Plan Overview: Maximizing wner benefits under a retirement plan is an effective methd f utilizing tax breaks and cnverting them int retirement savings. A Cash Balance plan can be an innvative means f bsting wner cntributins, and Primark Benefits ffers the expertise and services yu need t bring this meaningful plan type t yur business r firm. Gd candidates fr a cash balance plan include emplyers: Wanting deductins in excess f $50,000 fr each wner With a reliable earnings stream t fund benefits Able t make small yearly emplyee cntributins (if applicable) Additinal cnsideratins include: Emplyer bears investment risk Investments must be cnservative (nn-aggressive) Plan must exist fr five years, althugh cntributins may cease anytime Can be cupled with a 401(k) plan t maximize benefits Must meet additinal nn-discriminatin tests Requires actuarial valuatin, individually designed plan dcument Demgraphic changes can have a significant impact Cash Balance Plan Basics: A Cash Balance plan is a defined benefit plan that specifies bth the cntributin t be credited t each participant and the investment earnings t be credited based n thse cntributins. Each participant has an accunt that resembles thse in a 401(k) r prfit sharing plan. Participant accunts grw annually in tw ways: The cmpany cntributin a percentage f pay r a flat dllar amunt is determined by a frmula specified in the plan dcument, and; An annual interest credit. The rate f return is guaranteed and is independent f the plan's investment perfrmance. That rate may either be a fixed rate ver the life f the plan r may be based n the yield f 30-year Treasury bnds, which has hvered arund 5 percent in recent years. The interest credit is always psitive. The interest credit is nt related t the actual perfrmance f the Plans assets. When participants terminate emplyment, they are eligible t receive the vested prtin f their accunt balance.

2 Why a Cash Balance Plan and nt a classic Defined Benefit Plan? A classic defined benefit is usually mre difficult fr participants t understand and appreciate. The plan will describe all benefits in terms f an annuity payment at retirement. Fr example: Yu will receive an annuity starting at age 65 which is equal t 5% f yur average cmpensatin times the number f years f participatin, nt t exceed 20 years f participatin. On a year by year basis, a participant will be tld what his benefit at retirement is. Fr example: if the participant has an average salary f $100,000 Year ne s benefit is an annual annuity f $5,000 at age 65 Year tw s benefit has grwn t an annual annuity f $10,000 at age 65 Year three s benefit has grwn an annual annuity f $15,000 at age 65 Althugh the exact amunt f what this is wrth tday (as a balance) can be estimated, it is never a fixed amunt and an actuary will nt give yu a fixed number that yu can hang yur hat n. This is because the Plan will need t use interest rates applicable n the day that the lump sum is paid, and these rates change frequently. Whereas, with a Cash Balance Plan, yu will receive a statement shwing a slid number f what yur balance really is. Fr example: Yur Cash Balance Accunt is as fllws Beginning Balance: $100,000 Emplyer Cntributin $50,000 Earnings Credit: $5,000 Ending Balance $155,000 Hw Much Can I Cntribute? Cash Balance cntributins are age-dependent. The lder the participant, the higher the amunt is. The reasn fr this difference is that an lder persn has fewer years t save tward the apprximate $2.5 millin lump sum that is allwed in a Cash Balance Plan. Subject t IRS limits, the actual cntributin is determined by a frmula specified in the plan dcument. It can be either a percentage f pay r a flat dllar amunt. Hwever, this is where the Defined Benefit rules can make a Cash Balance Plan far superir t any srt f 401(k), Prfit Sharing, r Defined Cntributin Plan. The maximum allcatin t any individual under a Prfit Sharing Plan is $51,000

3 Under a Cash Balance Plan, the maximum cntributin is age dependent as fllws: Age at Plan Entry Maximum Cntributin Credit 35 $56, $71, $91, $116, $179, $207, $231,000 Prfit Sharing Plans allw cntributins t vary frm year t year depending n prfitability, but Cash Balance Plans must usually be amended in rder t change cntributin credits. Hwever, special rules fr Cash Balance Plans allw the credits t be funded ahead. Therefre, in gd years, the Plan spnsr can increase the cumulative cntributins by up t 150%, allwing fr an even greater range f cntributins, and allwing the maximum t be much higher. Emplyers can designate different cntributin amunts fr varius participants, but there is a restrictin n the frequency f amendments unless a valid ecnmic reasn exists. Fr example, if a firm's prfits are nt expected t supprt its Cash Balance Plan cntributin, then the plan can be amended. Any reductins must be made befre any emplyee wrks 1,000 hurs during a plan year. Fr increases, the plan must be amended within tw and a half mnths fllwing the end f a plan year. In additin, a Cash Balance Pensin Plan can als be frzen r terminated befre an emplyee wrks 1,000 hurs during a plan year. Deductins and Allcatins fr Partners and Owners Each Partner, Owner, and participant can have a different cntributin amunt. The amunt can be a percentage f pay r a flat dllar amunt. Fr Partnerships, tax deductins fr cntributins made n behalf f nn-partner emplyees are taken n the partnership tax return. Tax deductins fr cntributins made n behalf f partners are taken n their persnal r crprate tax returns. T be sure that the amunt deducted fr tax purpses by a partner as shwn n Schedule K-1 is the same as the amunt cntributed n behalf f the partner, the partnership agreement must permit this

4 methd f allcatin. Mst partnerships that adpt Cash Balance plans d nt want the partners' cntributins allcated like mst ther firm expenses, in prprtin t wnership. Either the partnership agreement r internal plicy shuld assure that each partner is allcated an apprpriate share f the plan's cst. Are Yu a Gd Candidate fr a Cash Balance Plan? Many partners and prfessinals find Cash Balance an excellent way t increase cntributins t their retirement accunts. The fllwing are typically gd candidates: Partners r wners wh desire t cntribute mre than $50,000 a year t their retirement accunts. Many prfessinals and entrepreneurs neglect their persnal retirement savings while they're building their practice r their cmpany. They ften have a need t catch up n years f retirement savings. Adding a Cash Balance plan allws them t rapidly accelerate savings with pre-tax cntributins as high as $100,000 t $250,000, depending n their age. Cmpanies already cntributing 3-4% t emplyees, r at least willing t d s. While Cash Balance plans are ften established fr the benefit f key executives and ther highly cmpensated emplyees, ther emplyees benefit. The plan can use the existing emplyer cntributins as a basic fundatin n which wner benefits can then be enhanced. Cmpanies which have demnstrated cnsistent prfit patterns. Because a Cash Balance Plan is a pensin plan with required annual cntributins (generally), a cnsistent cash flw and prfit is very imprtant. The Plan will nrmally prvide a minimum cntributin f between 5% and 7.5% f pay fr staff in the Cash Balance Plan r a separate Prfit Sharing 401(k) plan. Partners r wners ver 40 years f age wh desire t "catch up" r accelerate their pensin savings. Maximum amunts allwed in Cash Balance plans are age-dependent. The lder the participant, the faster they can accelerate their savings. Tp 10 Candidates: A Cash Balance plan may be ideal fr yur cmpany r firm if it falls int any f the fllwing categries: 1. Highly prfitable cmpanies f all types and sizes. - Usually indicated by the wner's desire fr a larger tax deductin. - Principals earning mre than $250,000 per year.

5 2. Family businesses - A Cash Balance Plan can be used as a cmpnent f successin planning. 3. Clsely-held businesses - Several wners want a greatly enhanced retirement plan. 4. Law firms f all sizes - Tax deferral and asset prtectin are ften very imprtant t this prfessin, alng with a highly cmpetitive retirement package t help attract and retain tp talent. 5. Medical grups f all sizes - Tax deferral and asset prtectin are ften very imprtant t this prfessin. 6. Prfessinal firms f all types - CPAs, engineers, architects, financial services firms, management cnsultants and thers. 7. Older wners wh have delayed saving fr retirement - They need t squeeze 20 years f saving int Thse wh highly value asset prtectin - ERISA prtects all qualified plan assets frm creditrs in the event f bankruptcy r lawsuit. 9. Thse wh want an enhanced benefits package fr executives - They want t attract and retain high caliber emplyees. 10. Sle prprietrs with incme exceeding $250,000 per year - All entity-types apply. Creditr Prtectin and Qualified Plans A Cash Balance plan is an ERISA Qualified Plan, and cntributins t qualified plans are deductible expenses. ERISA Qualified Plan assets are prtected frm creditrs in the event f bankruptcy r lawsuit. The antialienatin prvisin f ERISA states that "each pensin plan shall prvide that benefits prvided under the plan may nt be assigned r alienated." This means that the assets in a qualified plan are nt available t creditrs. Since prfessinals and business wners ften cnsider asset prtectin a premium, it is very advantageus t accrue retirement savings in an asset-prtected vehicle, like a qualified plan. These plans prvide a means fr business wners and partners t mve assets frm their businesses t a pensin plan. Once in the qualified plan, these assets are then prtected frm creditrs as a "nest egg" fr retirement r t pass n t heirs.