Is Cash Balance Plan Right for Your Business?

Providing a retirement plan for employees is becoming a mandatory requirement for businesses in some states including Maryland. There are several common retirement plans for small to mid-sized businesses, such as 401k and Simple IRA. To employers, the contributions to these plans are tax-deductible expenses; to employees, they are tax-deferred savings that provide financial security for the future. Besides these obvious benefits, right retirement plans also help attract and retain talents, and foster loyalty.

Though similar to defined contribution plans (such as 401k), a cash balance plan has the following characteristics:

  • Employer guarantees contribution and minimum interest rate
  • Annual actuarial and PBGU insurance requirements
  • Larger contributions allowed
  • Removes investment risk from employees
  • Better addresses concerns with security of retirement income

Because cash balance plan is a defined benefit plan, its design and administration are more complex than the defined contribution plan. It requires the business to use a Third-Party Administrator. The plan is also subject to ERISA reporting and disclosure rules like other plans.

In general, cash balance plan is used for businesses with steady cashflow and tend to provide more benefits to business owners and highly compensated and older employees.

To see if the plan is right for your business, an analysis is required, which is often provided by a TPA.

Leave a Reply

Your email address will not be published.