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Why a Cash Balance Retirement Plan Might be a Good Option for Business Owners

Posted by Michael D. Machen, CPA, CVA on Jul 30, 2015 7:00:00 AM


As a business owner looking to increase deductions for your own retirement savings, a cash balance retirement plan could be for you. In order to participate in a cash balance plan, you must meet the following criteria: 

  • Profitable business with disposable cash flow
  • Small or younger workforce, or workforce with a generous current retirement plan
  • Older owners that are active in the business

The Opportunity

A cash balance retirement plan is a defined-benefit plan that behaves a bit like a 401(k) plan.  Although participants are promised a monthly retirement benefit stream, their benefit is expressed as an account balance much like a 401(k) plan.  Participants are entitled to their “cash balance” should they leave the company, like a 401(k) plan, or could collect the retirement annuity like the traditional defined benefit plan.  Although the cash balance pension plan is a defined-benefit plan, unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis, much like a defined-contribution plan, such as a 401(k) plan.

The real opportunity is for owners who are older to put away significantly more money than in traditional defined contribution plans like 401(k)s.  For example, for an owner who is 60 years old, the individual limit for defined contribution plans is $53,000 per year, whereas the contribution may be over $200,000 in a cash balance plan.

Marrying a cash balance retirement plan with an existing defined contribution plan that is already providing generous retirement benefits may minimize the amount of contributions required to be made to the cash balance plan for non-owners.

The Benefit

A cash balance retirement plan provides both tax and non-tax benefits, particularly for older owners.  Some of these benefits include:

  • Considerably larger contributions for owners that are fully tax deductible
  • Protection against the claims of creditors for amounts in the cash balance plan
  • Some flexibility in the amount of contributions from year to year
  • Incentive for recruiting and retaining the best talent
Items used in a trade or business are not exempt under the sales tax holiday.

Although there are strict rules related to the operation and management of the plan, and the administrative costs are greater than a defined contribution plan, the benefits will often outweigh the additional costs and administration. The easiest way to find out if a cash balance plan makes sense is to have a study performed by a qualified actuary with the assistance of a retirement plan specialist.

Machen McChesney can help you determine if there are ways to combine a cash balance business strategy with your overall comprehensive financial plan to better prepare your executives for retirement. Looking for more cash balance, retirement or other business advisory services? Contact Mike Machen, CPA by calling (334) 887-7022 or by leaving us a message below.

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