Our cash balance plan calculator provides an illustration estimate of how much you can contribute. Just enter in some information regarding age and business income (or W2 as applicable) and our calculator will give you results. It’s quick and simple!
Cash Balance Plan Calculator
For purposes of the illustration, we will combine a cash balance plan with a 401k profit sharing plan. Our calculator will also generate a pdf report that will provide a breakdown between the contribution options. You can then download the pdf illustration and share it.
If you are a financial planner or tax professional, you can include your name on the report. You can then present the report to your client or even email it to them. The calculator also just provides an estimate for solo or one person cash balance plans. Upon request, we will provide a separate illustrations that will include employees.
Make sure you follow the form inputs carefully. If you are an S-corp or C-corp, you would only include your W-2 wages. If you are a sole proprietor, you would include an estimate of your business net profit.
We understand that cash balance plans can be challenging. The goal of the cash balance plan calculator is to provide a simple illustration that can be easily shared with all parties. They will especially come in handy for financial planners, investment advisors and CPAs.
Please note that the illustration is designed for solo plans only. If we receive an employee census we can provide a custom solution for you to review. The goal is to examine the maximum contributions that can be allocated to the business owner. From there, we can estimate contributions for employees and provide various strategies to maximize owner contributions.
With the increasing popularity of cash balance plans, there is often misinformation. So we decided to take a look at the cash balance plan basics and look at the true definition of what a cash balance plan actually is.
When we examine the cash balance plan rules, we can understand the complexities. So let’s try to just look at some of the basics and determine if a plan is right for you and your business.
The cash balance plan definition
Many people understand what a 401k plan is. It is a form of plan called a defined contribution plan. You put in a certain amount each year. It grows based on contributions and earnings. Then when you retire you have access to whatever the account balance is. It sounds very simple.
But a cash balance plan is a little different. It is a defined benefit plan. It promises an employee a contribution equal to a percent of each year’s earnings and a rate of return on that contribution. The benefit is always expressed as a total account balance.
This is in contrast to a traditional defined benefit plan, which typically promises an employee a flat dollar amount based on years of service or an annuity—a periodic benefit usually based on years of service and an employee’s earnings in the years closest to retirement.
But cash balance plans by definition work much like a defined contribution plans because an account balance is maintained for each participant. The plan provides for a specified accrual (as a percentage of pay) and a specified rate of investment earnings to be credited to the account each year. It is for this reason that they are often called hybrid retirement plans.
Cash balance plan illustrator: So what are the benefits?
There are many benefits to implementing a cash balance plan and the first is structure. Under the traditional pension plan, companies have to maintain an account with enough funds to pay individuals out indefinitely. This has lead to underfunded pensions or pensions that were used as a rainy day fund.
With the structure of a cash balance plan, the company contributes funds into a participants account and that’s it. The company no longer needs to maintain the funds in a separate account for future payout. This frees up cash flow for future expansion and growth.
It is important to note that there is not actually a cash account in existence for each participant. Hypothetical retirement accounts define an employee’s accrued benefit at any point in time. The account is merely a record-keeping feature.
By definition, cash balance plans require the use of actuaries. Traditional defined benefit plans use actuaries as well. The amount the employer contributes to the plan each year is based on actuarial assumptions.
But things can get a bit more complicated
In addition, employers can invest the cash balance plan funds just like they can invest other defined benefit plan funds. Participants’ retirement accounts grow by earning annual credits that typically are based on a flat percentage of pay and may or may not be integrated with Social Security benefits. In addition, accounts earn an interest credit each year that is tied to some external index, such as the Consumer Price Index or the rate on U.S. Treasury bills.
Benefit accrual formulas based on an employee’s career average earnings tend to be more beneficial to employees just beginning their careers than to employees who are close to retirement and have worked most of their career under a more traditional defined benefit plan.
Cash balance plan basics: Tax benefits
Tax benefits are a driving reason companies look into certain retirement plans and a cash balance plan is no different. Each business structure is different, but a cash balance plan by definition allows your company to a tax deduction for amounts contributed. With those savings, the company can use those extra dollars to fund parts of the cash balance plan. The benefit to that is it can be partially self-sustaining.
It is important to speak with your accountant because depending on if you are an S-Corp or C-Corp, it could have an impact on your tax savings. Also, be sure to run tests and analysis on the plan to determine feasibility.
So let’s look at an example
For example: employer XYZ provides a cash balance plan that credits all employees’ accounts with 6 percent of their annual salary. In addition, these accounts are credited with 5 percent interest, which is paid by the employer on an annual basis.
This method of benefit accrual allows cash balance benefits to grow more evenly over an employee’s career than would occur under a final average pay plan in which the majority of benefit accrual takes place in the final few years prior to retirement. In other words, benefits for cash balance plans are determined by an employee’s pay averaged over his or her total years of service.
Hopefully, you now understand the cash balance plan basics. But the details are what is really important. Make sure you run some scenarios with a qualified TPA (often called a third-party administrator). Only then can you determine if a plan is right for you.
Pensions are a commodity today that everyone loves to have, since defined contribution plans like 401k’s are more popular. Plans like 401k’s means that the employee (participant) needs to contribute to the plan. Defined benefit plans such as Cash Balance Plans are employer paid. What exactly are Cash Balance Plans, and how can they help you retire?
A cash balance pension is funded by the employer with a set percentage of the employee’s annual compensation, plus typically interest as well. Once again, a Cash Balance Plan is a defined benefit plan, meaning the responsibility to fund is on the employer.
Unlike traditional pensions, the money will be available as a lump-sum in retirement, hence the name Cash Balance. Another good advantage to the Cash Balance plan is that the management of the funds are typically allowed by the employee, much like a 401k. Various investment choices, such as Mutual Funds may be available. Traditionally, pensions were managed professionally by the employer/third party, and participants were just given a formula for an amount of money or income available at retirement.
Cash Balance pension plans typically give employees 5% to 8% of their salary each year as employer contributions. Participants also receive interest in the account, and most of the times also can choose other investment options, to potentially increase their savings. In terms of costs to an employer, Cash Balance plans can cost more than 401k’s to set up and maintain. Some costs can range from $2,000 to $5,000 in setup fees alone, and then thousands in annual fees, since they range in .25% to 1% of assets in the plan.
There are limits involved with Cash Balance plans, or any defined benefit plans. The limits are a lot more generous than 401k’s and other similar retirement plans. This makes the Cash Balance pension a popular option in later years to help greatly with taxes. In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:
- 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or
- $225,000 for 2019 ($220,000 for 2018)
The dollar amounts are subject to cost of living increases in future years.
As you can see by the characteristics of a Cash Balance pension plan, it is a popular plan today, giving you the best of a defined contribution plan, and a defined benefit plan. At Emparion, we pride ourselves on giving you the best information possible to create your own, IRS approved Cash Balance pension plan. You can find out more here at no obligation.