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    Accounting For Your Prosperity

    Cash Balance Plans, Are They Right For You?

    Posted by Michelle Buckley on Jun 20, 2019 10:10:00 AM
    Cash-Balance-Plans

    A cash balance plan is a qualified employee benefit plan which allows participants to accumulate retirement funds through company contributions and interest credits. A cash balance plan provides for a company contribution either in the form of a flat dollar amount or a percentage of pay and for a guaranteed interest component.

    As a plan sponsor, many factors contribute to what type of retirement plan is right for the company. Generally speaking, cash balance pension plans are good fits for the following companies:

    1. Profitable company with strong cash flows, as an annual contribution is required.
    2. Companies who have older key employees who want to maximize their contributions to the cash balance pension plan; the older the participant, the higher the contribution.
    3. Companies who will make a commitment to the funding of the plan and can afford to do so.

    Advantages of Cash Balance Plans

    • The contribution to the plan is a tax deduction due to the qualified status of the plan. As a result, federal income tax and state income tax will be reduced by the contribution to the plan.
    • Earnings accumulate tax-free to the participant, as with other qualified plans.
    • When a participant terminates employment, the vested portion of the plan is paid to the employee. Funds are not required to stay in the plan.
    • A cash balance feature can be combined with a 401k plan to offer more versatile plan design options.

    Disadvantages of Cash Balance Plans

    • Contributions to the plan are relatively fixed, which doesn’t allow for as much flexibility to the company.
    • Administration costs of the cash balance plan are typically higher than a typical 401k plan.
    • Plan documents typically are custom plan documents, which are more costly to maintain.

    As outlined, cash balance plans offer many advantages to those companies that are a good fit. Please contact Michelle Buckley at mbuckley@meadenmoore.com if you would like further information on considering a cash balance plan.

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    Another post by Michelle about benefit plan advising and auditing:
    The Department of Labor (DOL) and Target Date Funds (TDF) - How Do You Measure Up?

    Image via jesadaphorn/FreeDigitalPhotos.net

    Topics: Benefit Plan Advising & Auditing

    Michelle Buckley

    Written by Michelle Buckley

    Michelle Buckley is a Vice President in Meaden & Moore’s Assurance Services Group with 23 years of public accounting experience.

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