As tax time nears, there\u2019s one question every small <\/span>business<\/span> owner<\/span> is asking themselves (and their financial advisor<\/span><\/a>): \u201cWhy am I writing such a big check to the IRS<\/span>?\u201d<\/p>\n <\/p>\n No one is on the edge of their seats when the topic of taxes comes up. (Except for our Tax Director<\/a>, but that\u2019s a different story.) But the concept of tax <\/span>savings<\/span><\/em> is top-of-mind for business owners<\/span>, especially as filing deadlines approach.<\/p>\n As CFOs, we work more in tax forecasting rather than tax planning: We make sure our clients are setting aside estimated payments so there are no awkward cash flow surprises come April.<\/p>\n But another part of our job involves connecting our clients to experts who work \u2014 all day every day \u2014 on specialized areas, for example, tax deferred<\/span> retirement plans<\/span> that can help slim down that check and boost overall retirement savings<\/span>.<\/p>\n That\u2019s why we wanted to sit down and talk with David Podell, founder of Business Benefit Consultants, who specializes in cash balance plans<\/span>, a way to boost retirement accounts<\/span> at a faster pace than traditional qualified <\/span>retirement plans<\/span>, like a 401k or SEP IRA<\/span> whose annual <\/span>contribution<\/span> limits<\/span> are below the six-figure threshold.<\/p>\n For <\/span>business owners<\/span> looking to put away $100,000 or more in <\/span>tax-deferred<\/span> plans, the <\/span>cash balance plan<\/span> is growing in popularity. It combines elements of <\/span>defined benefit plans<\/span> and <\/span>defined contribution plans<\/span>: the <\/span>account balance<\/span> at retirement determines the <\/span>benefit amount<\/span>. However, while it could be paid as an <\/span>annuity<\/span>, it also could be a <\/span>lump-sum<\/span> payment (which could be rolled over into an <\/span>IRA<\/span> or another plan). <\/span> As the Department of Labor<\/span> explains, \u201cA cash balance plan<\/span> is a defined benefit plan<\/span> that defines the benefit in terms that are more characteristic of a defined contribution plan<\/span>. In other words, a cash balance plan<\/span> defines the promised benefit in terms of a stated account balance<\/span>.\u201d<\/p>\n Governed by federal pension laws \u2014 including the Employee Retirement Income Security Act<\/span> (ERISA<\/span>), the Age Discrimination in Employment Act (ADEA), and the Internal Revenue Code (IRC) \u2014 a cash balance plan<\/span> can boost the owner\u2019s and (to a lesser extent) the employee\u2019s benefits<\/span>.<\/p>\n The cash balance plan<\/span> isn\u2019t meant to replace all others; generally, it is combined with a profit sharing \u2018bucket\u2019 as well as a 401k \u2018bucket.\u2019 Adding one to the mix doesn\u2019t usually disrupt what is in place, but everything needs to get tested together to ensure the best plan design<\/span> to fit the businesses\u2019 objectives.<\/p>\n Most small <\/span>business<\/span> owners<\/span> have the majority of their net worth in the business. Maybe they have a 401k, maybe they have a profit sharing plan<\/span><\/a>, a SEP or some other plan.<\/p>\n For owners who are behind where they want to be in their retirement savings<\/span>, a cash balance plan<\/span> is a way for them to put a significant amount of money away on a pre-tax basis and take a big tax deduction<\/span>. While employees can receive some of the benefit, most cash balance plans<\/span> are geared towards providing most benefit to the owner and partners (generally between 85-100%) who also bear the risks.<\/p>\n It should go without saying, but to participate, a business needs profits and cash, usually $100,000 or more. Any less, and David recommends and on-the-shelf plan. Plans can go well into the half-to-one million range and beyond.<\/p>\n Like traditional retirement accounts<\/span>, a cash balance plan<\/span> requires that money be left untouched until 60. You can\u2019t access it or take a loan against it, let alone spend it. That\u2019s why these plans tend to be more popular with owners in their 50s who are looking to catch up on retirement planning<\/span>.<\/p>\n \u201cThey’ve gotten their business to a point where the business is seasoned,\u201d says David. \u201cThey’re comfortable with profits. They’re comfortable with what they’re taking. It’s grown and they want to be able to pay less in taxes and put away more for themselves on a pre-tax basis.\u201d<\/p>\n Beyond those big-picture requirements, there\u2019s a lot of flexibility.<\/p>\n Any entity type \u2014 LLC, S Corp, C Corp, etc \u2014 works, as long as the income is pensionable. For example, if you only have passive real estate income, you\u2019d need to have a management company that pays the owner. The amount of the contribution will depend, in part, on wages, so if an owner is taking a low wage, they might have to increase that to enable a higher contribution. It will mean higher income tax<\/span> and FICA but also a bigger social security check \u2014 in addition to the deferred tax benefits<\/span>.<\/p>\n In terms of contribution amounts<\/span>, cash balance plans<\/span> are designed to accommodate swings in profitability: because each plan is unique, it is possible to put in large sums one year and then nothing at all the following year.<\/p>\n \u201cWe only work with actuarial designs that are flexible in terms of annual contributions<\/span>,\u201d David says. \u201cThat’s going to be the biggest question: \u2018Can I put $100,000 away this year, but next year go to 0 or 300,000?\u2019 The answer is yes \u2014 we just need throughout the year to be in touch with how that client is doing and what they might want to do for a target funding of the next year.\u201d<\/p>\n That said, you don\u2019t want to open one of these plans for less than 3-5 years. David explains, \u201cThe IRS<\/span> does not want these big deductions and plans put in place and then shut down a year later. It doesn’t mean you need to fund at the same dollar amounts<\/span>, but that plan should be open and kept open for around those 3 to 5 years. The plan could be in place longer, even passed down to someone else in the business.\u201d<\/p>\n There\u2019s also freedom in terms of type of plan investments<\/span>. Plan assets<\/span> can go into private equity, real estate, other things outside of the traditional market, but the investment philosophy should be moderately conservative. Higher returns can come from a 401k.<\/p>\n \u201cAnything that gets a 10-15% rate of return<\/span> can lose 10-15% and that can mess with the funding,\u201d David explains. \u201cThat’s why we’re in touch with the advisors on where those assets should be from an investment risk<\/span> standpoint. You don’t want to go and make 30% every year for a few years, which overfunds the plan. The actuary<\/span> will have to say, \u2018Hey, you can’t put money in again. I know you want a deduction, but you’re stuck, because you put assets in the plan that were high flying.\u2019\u201d<\/p>\n How Much Does It Cost to Set Up and Maintain?<\/span><\/p>\n A cash balance plan<\/span> consultant works with a third-party administrator (an enrolled actuary<\/span>). In addition to packaging all the resources for the client and their advisors to understand, there is continual behind the scenes work: coordination, compliance, filing, etc.<\/p>\n Rather than being paid as investment advisors, there is a design and administration fee that can range from $4,000 for a solo plan to $6,000-$8,000 for a complex plan with multiple employees.<\/p>\n With all the potential upside, why isn\u2019t this a more widely adopted tax-savings<\/span> approach? David suggests it\u2019s because, \u201cThere are a lot of resources involved. There\u2019s complexity. Because of that, people don\u2019t know where to go for it, or they\u2019ll go directly to a third-party administrator or an actuary<\/span> \u2014 and that might<\/em> work out, but clients don\u2019t know what they don\u2019t know. There may be a better plan out there for them.\u201d<\/p>\nWhat Is a Cash Balance Plan<\/span>?<\/h2>\n
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<\/p>\nWho Can Benefit from a Cash Balance Plan<\/span>?<\/h2>\n
How Does the Investment Work?<\/h2>\n
How to Get Started<\/h2>\n
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