Defined Benefit Plan for Highly Compensated Business Owners
A cash balance plan is a type of Defined Benefit Plan which allows for individuals to make very high tax-deferred contributions to their retirement and usually for self-employed or small business owners over who are looking to make large retirement plan contributions.
Cash balance plans do require a Third-Party Administrator (TPA) and a plan actuary that will administer the plan and make IRS filings.
We recommend that your CPA or tax advisor work directly with the Third-Party Administrator (TPA) to make sure you are following all the IRS codes regarding the cash balance defined benefit plan.
Pay Credit
The formula that is a percentage of the participants compensation that is credited to the participants cash balance plan each year.
Investment Credit
Fixed or variable formula defined in the plan adoption agreement that is linked to a particular index, such as the one-year treasury bill or 30-year Treasury Note.
Investment Risk
The investment risks are sole borne by the employer, the increases and decreases of the investments inside of the cash balance plan do not directly affect the yearly participant benefit amounts.
A Cash Balance Plan is a type of defined benefit pension plan that allows for significantly higher contribution limits compared to traditional 401(k) or profit-sharing plans. It is ideal for high-income earners, business owners, and self-employed individuals looking to maximize retirement savings and reduce taxable income.
A Cash Balance Plan functions like a hybrid pension plan. Employers contribute to the plan on behalf of employees, and the balance grows based on a pre-set interest credit rate. Unlike traditional pension plans, participants have individual account balances, making it easier to understand projected benefits.
Business owners, professionals (such as doctors, attorneys, and consultants), and self-employed individuals with high, stable income often benefit the most from Cash Balance Plans. Even small businesses with a few employees can implement a plan with the help of a Third-Party Administrator (TPA).
Cash Balance Plans offer the highest contribution limits in the IRS code, and limits vary based on age and compensation. Contributions can range from $75,000 to over $300,000 per year, depending on factors such as age, income, and plan design.
For example:
Cash Balance Plans offer major tax advantages, including:
Cash Balance Plans require ongoing compliance with IRS and Department of Labor regulations, including annual actuarial certifications. Due to their complexity, employers must hire a Third-Party Administrator (TPA) to handle:
Cash Balance Plans have specific distribution rules, including:
Take the first step to a brighter future.