“Beyond the 401(K)” a Series of Articles Exploring Options Beyond the Traditional 401(K) Plan
If you are looking for a way to maximize retirement plan contributions beyond what a 401(k) plan offers, you may consider adopting a Cash Balance Plan in combination with your existing 401(k). Here are 4 frequently asked questions regarding Cash Balance Plans:
Contributions are fixed and mandatory. The client cannot treat this like a glorified profit sharing plan. All shareholders or partners need to be committed to the plan. They should all expect to participate, and expect to make significant contributions each year. Once the contribution has been earned for the year it must be funded, even if the participant has terminated service. Accounts must be fully vested after three (3) years of service. There is no graded vesting schedule. All plans are individually designed, and must be submitted to the IRS for approval. The sponsor should expect to maintain the plan for a minimum of five (5) years.
Yes. The 401(k) can be established for the elective deferrals, and an Employer contribution of up to 6% of compensation. If the owners of the company wish to participate in the 401(k) plan, we typically recommend that they adopt the “safe harbor” provisions, and contribute between 5% and 6%. This allows them to avoid the ADP and ACP compliance testing, and often satisfies the top-heavy minimum contribution requirement for both plans
The contribution is structured as a “pay credit” and an “interest credit”, so once those “credits” are written into the plan they can be modified only rarely (not every year). The contribution may be computed as of the beginning of the plan year so you will have the opportunity to have over a year to fund that contribution.
The plan can be terminated at any time for a legitimate business reason such as acquisition. All participants would be paid the benefit that would have accrued to the date of termination.
For more information, contact us.
