Why Business Owners Shouldn’t Overlook Cash Balance Plans
For many business owners, the thought of starting a Cash Balance Plan can feel overwhelming. The increased administrative costs and minimum funding requirements can seem like deal-breakers. But in most cases, the benefits far outweigh the costs, making it a powerful way to “superfund” your retirement.
If you already have a 401(k) Profit Sharing Plan in place, adding a Cash Balance Plan might not be a major financial stretch. But for businesses starting from scratch, the required contributions and administrative costs may give some business owners pause. If your business is thriving and generating consistent profits, a Cash Balance Plan could be an efficient strategy to reduce taxes and maximize retirement savings.
Breaking Down the Numbers
Consider a husband and wife owned business that is generating around $600,000 in profits each year. With a combined federal and state tax rate of 45%, they are looking at about $270,000 in taxes.
By implementing both a 401(k) Profit Sharing Plan and a Cash Balance Plan, they could substantially reduce their tax liability. This strategy not only enhances the couple’s retirement savings but also offers retirement benefits to their employees, improving morale and retention.
Let’s look at the illustration below using 2024 IRS contribution limits.
The couple can contribute up to $580,150 across both the 401(k) Profit Sharing Plan and the Cash Balance Plan. To meet non-discrimination requirements, they only need to allocate $13,825 for staff contributions – a modest amount given the overall benefits. Additionally, all employer contributions for staff are tax-deductible.
To fully understand the costs, it’s important to account for administrative expenses as well. For a plan with six participants, here’s the annual cost breakdown on our platform:
- ERISA Advisory Fees
- 401(k) Profit Sharing Plan: $3,700
- Cash Balance Plan: $5,000
- Third-Party Administrator Fees (for both plans): $4,750
- Recordkeeping Fees (401(k) Plan): $2,900
Total Annual Administrative Fees: $16,350
Some of these fees can be offset through IRS tax credits under the SECURE Act 2.0, and the remaining expenses are fully tax-deductible, further minimizing the financial impact.
Is It Worth It?
In total, the couple’s annual outlay is $30,175. In return, they can save over $250,000 in taxes and add nearly $600,000 in annual retirement savings. Beyond the tax advantages, these plans also allow the couple to offer meaningful benefits to the employees who contribute to the business’s success.
If you are interested in generating an illustration for your own business, please provide us with an updated employee census. Contact us to receive employee census template.