So let’s take a closer look at the pros and cons of cash balance plans:
What Are The Pros?
Let’s examine some of the pros of a cash balance plan:
- Businesses will typically be able to contribute and deduct more than in a defined contribution plan.
- Contributions can be made subsequent to year-end and still take a tax deduction for the prior year (as long as they are made before the tax return is filed)
- For older self-employed individuals, the plan allows substantial contributions and provide a means of getting large contributions over a small period of time.
- They can be combined with other qualified plans, such as 401k and profit sharing plans.
- They can be established for owner only business or large companies.
- Participant loans are allowed.
- There are no set contribution limits. Deduction limitations are calculated by an actuary.
- Benefits are not based on asset returns. Therefore, it minimizes risk to the employees.
What Are The Cons?
But before you sign up for a cash balance plan, take a look at a few of the cons:
- The plan administrator must annually file a Form 5500 with a Schedule B.
- The Schedule B calculations must be determined by an actuary and signed by the actuary.
- Along with other defined benefit plans, it is one of the more costly plans to administer. Fees will typically start around $2,000 annually.
- They are administratively complex plans and can often be difficult for employees and plan sponsors to understand.
- The plans are not as flexible as a 401k plan.
- They are not elective plans. Even though a plan can be frozen or even terminated, a cash balance plan is established with annual contribution requirements.
- An excise tax applies if the minimum contribution requirement is not satisfied.
Cash balance plans work very well under the right circumstances. But make sure that you are educated. The pros and cons of cash balance plans may not always be clear. But once you clearly understand them you can make the proper decision as to whether a plan is right for you.