Looking to Maximize Retirement Savings? A Cash Balance Plan Could Be the Answer!

Post On: September 21, 2021

Posted In: Financial Planning Retirement

So, you established a 401(k) plan for your company and have been contributing consistently for years. The plan has likely afforded your company significant tax savings and has allowed you to attract and retain quality employees. Although a 401 k) plan is a great savings vehicle, did you know there is a type of qualified retirement plan that will allow you to contribute significantly more than the maximum allowed in a stand-alone 401(k) profit sharing plan?


Most are familiar with defined contribution plans (e.g., 401(k) and profit sharing plans). You are probably also familiar with traditional defined benefit plans, or pension plans, historically sponsored by large companies to provide monthly retirement benefits to their retirees. For business owners that are looking for large tax deductions, accelerated retirement savings, and additional flexibility, another type of defined benefit plan, a cash balance plan, may be the perfect solution.



As mentioned above, a cash balance plan is a type of defined benefit plan. In general, defined benefit plans provide a specific benefit at retirement to participants. While traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, cash balance plans state the benefit as a hypothetical account balance. Each year, this hypothetical account is credited with following:

  • A pay credit, such as a percentage of annual pay or a fixed dollar amount that is specified in the plan document.
  • A guaranteed interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).


The accounts in a cash balance plan are referred to as hypothetical because, unlike defined contribution plans, the plan assets are held in a pooled account managed by the employer (or an investment manager appointed by the employer). The hypothetical account balances are an attractive feature of cash balance plans, because these accounts tend to be easier for participants to understand, as the annual benefit statements reflect the value of their account, similar to 401(k) profit sharing plan account statements.


Unlike a 401(k) profit sharing plan, a defined benefit plan guarantees the benefit each participant will ultimately receive. An actuary calculates the benefits earned each year based on the terms of the plan document, which in turn determines the required employer contribution due to the plan.


When a participant becomes entitled to receive his/her benefit from a cash balance plan, the benefits are defined in terms of an account balance and can be paid as an annuity based on that account balance. In many cash balance plans, the participant also has the option (with consent from his or her spouse) to take a lump sum benefit that can be rolled over into an IRA or to another employer’s plan.




In most cases, cash balance plans work best when paired with a 401(k) profit sharing plan. To optimize the combined plan design, it’s possible that certain provisions in your current plan may need to be amended. This is especially true if the cash balance plan covers non-owner employees. Due to the large benefits that are typically realized by the owner and/or other key employees, the combined plans must pass certain nondiscrimination tests. These tests are more easily passed when employer contributions are provided to the staff under the 401(k) profit sharing plan as safe harbor nonelective and profit sharing contributions. While company contributions in a stand-alone 401(k) profit sharing plan may be discretionary, when combined with a cash balance plan, these contributions become required, as well, since, without them, the combined plans will likely not pass all required nondiscrimination tests.




Unfortunately, the answer to this question is “no.” The first question to ask yourself is if you wish (for tx savings or other reasons) to make contributions in excess of the defined contribution limit ($58,000 or $64,500 for participants over age 50 for 2021). If the answer to this is “yes,” then the demographics of the employer must be considered. Since the maximum contributions are age dependent, cash balance plans typically work best when targeted employees are older than the average age of other staff members. And, maybe most importantly, do you anticipate consistent profits that will allow you to fund all required contributions for the foreseeable future?


For employers that desire increased retirement savings and tax deductions, cash balance plans may be the perfect addition to their employee benefit program. It’s important to work with an experienced service provider.  Contact the retirement plan experts at Ambassador Advisors to determine if a cash balance plan is right for you.


Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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