Cash balance plans allow for significant retirement contributions. They are technically defined benefit plans. But they have some characteristics that are similar to a defined contribution plan. Accordingly, they are often called hybrid plans.
But questions arise. What type of companies are good candidates for cash balance plans? What professions make the most sense for cash balance plans? Will a cash balance plan make sense for my business?
The truth is that many business types and professionals are ideal candidates for cash balance plans. The following are the top 5 candidates for cash balance plans:
- Companies with consistent profits (historically and forward-looking)
- Professional service businesses (doctors, lawyers, CPAs, etc.)
- Companies looking to improve morale and employee retention
- Owners trying to “catch-up” on retirement savings
- Owners looking to maximize tax deductions
The truth is that you don’t have to have high profits for a cash balance plan to make sense for you. But of course, it helps.
Companies who have consistent profits are excellent candidates. If your business is very cyclical and subject to boom years as well as bust years, it can be more challenging. In reality, even a company with inconsistent cash flows can do very well with cash balance plans, but it just becomes more difficult when times are challenged.
Ideally, consistently high cash flows and the through of decent cash flows over the foreseeable future make the most sense. We have seen companies in manufacturing, distribution, real estate and a variety of service businesses. If a business owner makes more than $200,000 a year, it might make sense to consider.
Professional Service Businesses
While any business industry can be a good candidate, professional service firms can work great. Professional service firms tend to have less overhead and higher earnings power than many business types.
Let’s look at some professional service firms that could benefit from a cash balance plan:
- Attorneys and law firms
- Accountants and CPAs
Law firms and medical groups have historically been significant proponents of cash balance plans. Obviously, a significant reason why is because of consistent high income. But these practices are looking for a way to get more money into practitioner’s retirement accounts.
Improve Employee Retention
Finding quality employees can be a challenge for many business owners. Most cash balance plan sponsors would like to maximize the savings for owners or partners. But others are looking to improve employee morale and retention. Improving a company’s retirement plan can be a great option.
If a company is willing to contribute 5-7.5% to employees, then that is a good starting point. Motivating employees with a cash balance plan can be great for morale. Also, the owner can consider vesting options that can still improve retention while offering deductions for the plan sponsor.
Owners Behind on Retirement Savings
Let’s face it. Most people are behind on retirement savings. As they age, the try to get as much as possible contributed. But the problem is that life gets in the way. Kids need money for college – vacation plans get in the way. As human beings, we also can make every excuse possible to get behind on our retirement planning. Unfortunately, we need a plan to get more money contributed.
401k plans have maximum contribution limits of $60,000. This limit assumes that the participant is over the age of 50. Owners and partners who want to contribute more than this are typically stuck. A cash balance plan can be an excellent fit for these people.
Owners Looking to Maximize Tax Savings
Retirement savings is nice. But minimizing taxes is what drives the majority of business owners to cash balance plans. When combining the marginal federal tax rates (with state tax rates as well), it makes a cash balance plan a no-brainer for business owners looking for tax savings. Any cash balance contributions will come off at the owner’s marginal tax rate.
Most clients should save at least 40% in taxes when you consider their marginal rates. But in states like California where the top marginal income tax rate is 13.3%, a cash balance plan can be especially appealing. With the top federal rate at 39.6%, even employers who reside in states with no (or little) state tax it can make a big difference.
The best candidates have a combination of all the characteristics noted above. But most importantly, they should be committed to the plan and all the benefits that come with it.