As a medical practice, law practice or other business grows, business owners may wish to shelter additional income from taxes beyond that of what a 401k plan allows. A pension plan may be just the answer to accomplish this goal. Contrary to the decreasing popularity of traditional pension plans, the number of Cash Balance Pension (CBP) plans have been increasing. As noted in Kravtiz’s 2017 National Cash Balance Research Report, “Since 2001, cash balance plans have had double-digit annual growth almost every year and a fifteen-fold increase over 15 years.” So, what has been making CBP plans so attractive?

Attractiveness of a Cash Balance Pension Plan

The growth of CBP plans can be attributed to recent law changes making the plans more flexible and easier to administer. Also, with the “baby boomer” population nearing retirement, these plans offer a terrific way to catch up on retirement savings. See below:

  • CBP plans allow for large tax deferred contributions (subject to limits) and can be used in conjunction with a 401k plan.
    • A 55-year-old fully maximizing his/her 401k and CBP plan contributions could defer up to $255,000 of income into retirement plan savings this year (2018).
  • Tax savings from the contributions can more than offset the costs of the plan.
  • Maximum contribution limits increase with the participants age.
  • Allows contribution flexibility to skew contributions in favor of owners
  • Differing from traditional pensions plans, CBP plans report annual statements for each individual participant detailing contributions made and their accumulated benefit. Also, there is portability of benefits if someone leaves the company.

Is a Cash Balance Plan Right for You?

You are a good candidate for a CBP plan if:

  • You are a business owner currently maximizing 401k plan savings and you would like to defer even more income into retirement savings.
  • Your company has had consistent profits.
    • CBP plans require annual contributions, so consistent cash flow is important.
  • Owners of the firm are older and have a desire to “catch up” their retirement savings.
    • This aligns well with a CBP plan given the increased contributions limits with age.
  • Your company is already contributing 3-4% of employees’ salaries to their retirement plans.
    • CBP plans have contribution requirements for employees. If you are already contributing to their plans, this added requirement will not be as much of an adjustment when implementing the CBP plan.

The above criteria are a good starting point for considering a CBP plan, but further analysis is needed. If you think this tax savings/retirement savings strategy could be a fit for you, please contact D3 Financial Counselors to further discuss.


—Brett Spencer MS CFP® CEPA