Many profitable small-business owners would like to have a retirement plan that can provide more than $50,000 of deductible contributions to the owners and other key employees.A defined-benefit plan is perhaps the only tax-qualified retirement plan that can achieve this. However, in traditional DB plans, the worker benefit costs are too high to make them practical. A cash-balance plan is the solution (see box).
Unlike other defined-benefit plans, a cash-balance plan may be designed to better control the cost of the rank-and-file employee benefits. A cash-balance plan may be designed to either level the owner's contributions, despite wide differences in age (not shown), or to optimize each owner's contribution. As the example also illustrates, the typical cash-balance plan often results in over 90 percent of the benefits being derived by the business owners.
The cash-balance plan uses an innovative allocation method allowable under the Internal Revenue Code to provide comparable benefits to the owners, when compared to the average benefit awarded to the employees. Remember: "Comparable" need not be equal. This ability makes cash-balance plans feasible in many situations where a classic defined-benefit plan would be too costly.
Unlike traditional defined-benefit plans that are often underappreciated, a cash-balance plan awards each participant a specific contribution, and the plan guarantees that it will grow at a fixed rate selected by the business owner. The retirement benefit may simply be the cash balance.
Its advantages include:
* Acquiring tax deductible life insurance;
* Protecting assets from creditors;
* Guaranteed retirement and survivor benefits;
* Leveling owner contributions, if desired;
* Easy to understand;
* Larger plan contributions and tax deductions; and,
* The ability to combine with a 401(k) plan.
Lance Wallach, CLU, ChFC, CIMC, speaks and writes about VEBAs, retirement plans and tax reduction strategies For more information, visit www.vebaplan.com.
A cash-balance plan sample
Census data Cash-balance
Name/Position Age Salary plan
Owner 1 64 $220,000 $239,338
Owner 2 51 $220,000 $108,174
Worker A 49 $70,000 $5,036
Worker B 37 $65,000 $4,676
Worker C 30 $62,000 $4,461
Worker D 32 $60,000 $4,316
Worker E 28 $56,000 $4,029
Worker F 36 $30,000 $2,159
Worker G 30 $25,000 $1,798
Worker H 44 $25,000 $1,799
Worker I 48 $22,000 $1,580
Worker J 44 $20,000 $1,438
Worker K 41 $20,000 $1,437
Worker L 48 $15,000 $1,076
Worker M 67 $12,000 $864
Worker N 55 $11,000 $792
Plan totals $933,000 $382,973
Owners' total $440,000 $347,512
Percent to owners 47% 91%
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