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Cash Balance Plans

A Cash Balance Plan is a type of tax qualified retirement plan. By satisfying the provisions of Section 401(a) of the Internal Revenue Code, qualified retirement plans provide for tax deductible contributions, tax deferred growth of plan investments, and protections from creditors. For a business owner funding the maximum benefit to a Cash Balance Plan, the business owner’s annual tax deductible contributions are typically in the range of $100,000 – $200,000 (depending on the business owner’s age and annual income). See the chart to the right for Cash Balance Plan annual benefit maximums based on age (use table scroll bar to scroll down for all ages). These maximums assume adequate participant compensation.

Benefits in a Cash Balance Plan are defined in the plan's document as a Contribution Credit and an Interest Credit for the plan participant. The plan sponsor then makes contributions to fund the plan based on those defined benefits. The plan's asset gains can also cover the benefits that are accrued. Typically the plan's Interest Credit is a fixed credit rate between 3-6%. This rate is chosen by the plan sponsor at the start of the plan. If plan assets perform better than the Interest Credit Rate then the plan sponsor would either reduce contributions over the life of the plan, or look at increasing benefits for the plan participants. If plan assets underperform the interest credit rate then the plan sponsor would contribute more to the plan to account for that.

You can have both a Cash Balance Plan and 401k Profit Sharing Plan. In fact, most Cash Balance Plan sponsors have both types of plans in order to maximize retirement plan contributions. In some situations having a Cash Balance Plan does limit the amount of profit sharing contribution you can make to a 401k Profit Sharing Plan, but the contribution maximum in the Cash Balance Plan more than makes up for the limited profit sharing. It is typical for a plan sponsor with both plans to be able to contribute 3-4 times the amount the sponsor could otherwise contribute in a standalone 401k Profit Sharing Plan. Please contact us for more details about how a Cash Balance Plan could be right for your business.

2023 Maximum Cash Balance Benefits

* Max Cash Balance figure assumes adequate participant compensation based on IRC Section 415. Contact us for additional information regarding this calculation.

**37% tax rate used for example purposes only. Please consult with your tax advisor regarding the impact of retirement plan contributions on your taxes.

401k Profit Sharing Plans

A 401k Profit Sharing Plan is a type of tax qualified retirement plan, similar to a Cash Balance Plan. By satisfying the provisions of Section 401(a) of the Internal Revenue Code, qualified retirement plans provide for tax deductible contributions, tax deferred growth of plan investments, and protections from creditors.

 

A 401k Profit Sharing Plan allows the plan participant to reduce taxable income via 401k salary deferrals to their retirement account. Small business owners can also reduce passthrough taxable income with deductible profit sharing contributions from their business income to their retirement account.

The 2023 maximum 401k Profit Sharing Plan contribution limits can be found in the table to the right. The benefit limits in this type of plan are typically less than the benefit limits in a Cash Balance Plan. Plan sponsors will oftentimes first adopt a 401k Profit Sharing Plan. When they are consistently maximizing the 401k Profit Sharing Plan and would like additional deductibility they then adopt a Cash Balance Plan as well. Please contact us for more details about how a 401k Profit Sharing Plan could be right for your business.

2023 Maximum 401k Profit Sharing Contributions

* Max Profit Sharing figure assumes a standalone 401k Profit Sharing Plan or a 401k Profit Sharing Plan paired with a PBGC-covered Cash Balance Plan.

**37% tax rate used for example purposes only. Please consult with your tax advisor regarding the impact of retirement plan contributions on your taxes.

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