J.G. Gaston & Associates, Inc.
Actuarial Consulting Services for Business, Government, and the Individual

Cash Balance Plans

Description

Cash Balance Plans provide a retiremnent benefit equal to the accumulated value of an account balance. This accumulated account balance is computed based on plan contribution rates and investment income stated in a plan document rather than on actual contribution and investment experience. For instance, a cash balance plan might define the contribution rate as 10% of an employee's compensation and define the investment rate as 5.0% per annum. The benefit the employee receives is the balance in this account at retirement. Now, the actual investment performance of the trust which receives the true employer contributions may be less than or greater than 5.0%. If the underlying trust performs better than 5.0%, employer contributions are reduced. If the underlying trust performs below 5.0%, employer contributions are increased. So true investment performance doesn't affect the employee's retirement benefit - the employee is essentially guaranteed a 5.0% investment return on his cash balance account.

Why provide a guaranteed investment return for my employees?

In our area of cash balance plan practice, we are often dealing with a closely held corporation which has one or more principals who will participate in the cash balance plan. In certain situations, cash balance plans offer unique opportunities which are not available in other qualified retirement plan designs. The primary advantage of a cash balance plan is the ability of the principal(s) to receive contributions in excess of the maximium contribution limits under ยง415 for defined contribution type plans ($51,000 for 2013). If the principals are willing to offer this guaranteed investment return in order to take advantage of higher contribution limits, then a cash balance plan may be a good fit.

Illustration

The following is an illustration of a cash balance plan installed on top of an existing 401(k) profit sharing plan.



 
Employee Age

 

Annual

Compensation

Rate

 

401(k)

Elective

Deferrals

Employer

3% Safe

Harbor

Contributions

 

Profit

Sharing

Contribution

 

Cash

Balance

Plan

 

 

Total

Contributions

Owner1 60 255,000 17,500 7,650 25,850 45,569 96,569
Owner2 55 255,000 17,500 7,650 25,850 45,569 96,569
Owner3 50 255,000 17,500 7,650 25,850 45,569 96,569
Sub-total   765,000 52,500 22,950 77,550 136,707 289,707
Staff1 45 50,000   1,500 2,941 750 5,191
Staff2 40 40,000   1,200 2,352 600 4,152
Staff3 35 35,000   1,050 2,058 525 3,633
Staff4 35 30,000   900 1,764 450 3,114
Staff5 30 25,000   750 1,470 375 2,595
Staff6 30 25,000   750 1,470 375 2,595
Staff7 30 25,000   750 1,470 375 2,595
Staff8 30 25,000   750 1,470 375 2,595
Staff9 30 25,000   750 1,470 375 2,595
Staff10 25 20,000   600 1,176 300 2,076
Staff11 25 20,000   600 1,176 300 2,076
Staff12 25 20,000   600 1,176 300 2,076
Sub-total   340,000 0 10,200 19,993 5,100 35,293
Grand Total   1,105,000 52,500 33,150 97,543 141,807 325,000
Ratio of Pirincipal to Employee      
2.3 to 1
3.9 to 1
26.8 to 1
8.2 to 1