Cash Balance Plan

What is a Cash Balance plan?

A CB plan, while classified as a type of Defined Benefit (DB) plan, is defined by the IRS as a statutory
hybrid plan. What makes it a hybrid? CB plans can allow owners to fund much larger contributions than
401(k) and IRA type plans but communicate benefits in a 401(k) style with account balance statements.

How much can I contribute as a maximum compared with 401(k)s?

The contribution is determined actuarially on a case-by-case basis. It may be $100-300,000 per year for
the owners while the employees receive 7.5 to 10% of their pay as a contribution.

Compared with a Cross Tested Safe Harbor Non-elective 401(k) plan, the owners may receive $57,500
per year as of 2014 (Profit Sharing, Safe Harbor Contributions and Deferrals) while the employees
receive 5 to 7.5% of their pay as a contribution from the employer.

All of these contributions are tax deductible giving owners a huge incentive, if cash flow allows, in
sponsoring these types of plans.

Any extra fees are more than paid for through the increased tax savings.

How does funding look in a CB plan versus a DB plan?

While not easily shown in a proposal format since that only shows year one, DB plan contributions
increase parabolically over time and can have wild and unpredictable funding changes. However, CB
plans allow for more stable funding. In general, the contribution will be about the same every year.
Because of this stability, most Pension Actuaries prefer CB/401(k) Combinations when an employer has
employees and wants to sponsor a DB-type plan.

How do accounts work in these plans? Are they the same as 401(k)s?

No. By law, CB plans are held in one pooled account rather than individual accounts, like 401(k)s
(though, do not necessarily have to). As such, we recommend finding an investment advisor familiar with
CB plans (we have several recommendations).

This helps clear up many fiduciary issues making the DB or CB plan often less of a liability than a 401(k)
plan (e.g. a stock drop lawsuit, a fiduciary's main risk, is greatly lessened).

The CB plan is only required by law to produce one statement per year (which the Pension Actuary
produces), as opposed to four per year in a 401(k).

If I want my contribution to be the same every year, say $100k, can I do that with
a CB plan?

Yes, this is much easier to accomplish in a CB plan and part of why we tend to recommend these plans in
companies with employees as opposed to Traditional DB plans or Floor Off-set plans.

If, however, contributions ever become unruly, we can easily lower the benefit formula through a Plan
Amendment, freeze the plan or terminate the plan altogether.

What can be invested in a DB or CB plan?

Generally, the same investments as 401(k)s: mutual funds, stocks, bonds and/or annuities. These plans are
more conducive to holding life insurance (death benefits, key man or buy/sell agreements) than 401(k)s.
In addition, alternative assets are more commonly held in these plans like collectibles, real estate or IPOs.

However, it is recommended that the assets held are conservative to moderate risk the funding is partially
based on investment experience.