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

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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