How It Works
How Do Cash Balance Plans Work?
Cash Balance Plans are a great design for employers seeking to fund much larger contributions than permitted under a 401k and Profit Sharing Plan. This plan design is a type of Defined Benefit Plan, but offers some of the best features of Defined Benefit Plans and Defined Contribution Plans. They can also be paired with a 401k plan to provide greater flexibility and savings potential.
In a Cash Balance plan, participants have a hypothetical “account” that is credited with a pay credit (i.e., 5% of pay)
Who is a good fit for a Cash Balance Plan?
Any business can establish a Cash Balance Plan, including sole-proprietorships, partnerships, corporations, and other types of entities. Cash Balance Plans are most suitable for highly profitable businesses with stable cash flow.
With the right demographics, contributions between $100,000 and $200,000 for owners or high-compensated employees can be made. All contributions are fully deductible to the business for federal income tax purposes.