Cash balance plans are great retirement vehicles. For many business owners, they are one of the best plans on the market. But they are not for everybody. There are some companies who are ideal candidates for cash balance plans.
The plans are technically defined benefit plans that define retirement benefits similar to a defined contribution plan. This is why they are often called hybrid plans.
But questions arise. Who are ideal candidates for cash balance plans? What professions make most sense for cash balance plans? Does a cash balance plan make sense for me?
The truth is that there are many companies and professionals who are ideal candidates for cash balance plans. The following are the top 5 ideal 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 great candidates. If your business is very cyclical in nature 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 most sense. We have seen companies in manufacturing, distribution, real estate and a variety of service businesses. If a business owner makes in excess of $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. That’s why they are some of the best candidates.
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 large proponents of cash balance plans. Obviously, a large reason why are 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. In addition, the owner can considering 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 also assumes that the participant is over the age of 50. Owners and/or partners who want to contribute more than this are normally stuck. A cash balance plan can be a great fit for these people. Take a look at this cash balance plan example.
Owners Looking to Maximize Tax Savings
Retirement savings is nice. But minimizing taxes is one of the best benefits and 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.
Best Cash Balance Plans
The best candidates have a combination on all the characteristics noted above. But most importantly, they should be committed to the plan and all the benefits that come with it.