The Little Known Retirement Savings Vehicle – Cash Balance Plans

by Tom Allen and Mark Hebner - Friday, 10 October, 2014

Saving for retirement always seems like a monotonous topic of discussion – the party killer if you will. Terms like 401(k), Safe Harbor, salary deferrals, Roth contributions, do not draw the same amount of excitement as celebrity gossip, the upcoming weekend of football, or whether to go with the iPhone 6 or iPhone 6 Plus. But what if we were to tell you that there was a way to save you up to an extra $120,000 in income taxes this year through your retirement plan? Wow! We may have just found the most popular person in the room.

The often unknown or disregarded Cash Balance Plan is rising in popularity1,especially amongst small professional firms such as physician practices, law firms - or what one third-party administrator, Kravitz Inc., likes to call, “the ologists.”

What is a cash balance plan? Here are the basic facts:

    Qualified (preferential tax treatment) retirement plan

  • Has the same basic features as a traditional defined benefit plan (pension), but has the look and feel of a defined contribution (401(k) etc.) plan (see charts below for a comparison)

  • Allows participants to contribute up to an additional $230,000 per year away for retirement. This is on top of the $17,500 in salary deferrals (an additional $5,500 if you are age 50 or older) and $34,500 in profit sharing contributions (see contribution limits table below and estimated tax savings for 2014)

  • Assets are pooled together and invested as one account. This is different than a 401(k) plan where each participant has their own separate account where they determine their own asset allocation


We will say, up front, that a Cash Balance Plan is not for everyone and should be carefully examined before taking the plunge. The most important decision that a plan sponsor can make when adopting a cash balance plan is to partner with an experienced third party administrator (IFA works with many different TPAs) as well as a knowledgeable advisor to help with plan design and investment strategy.  Some of the considerations that go into plan design include:

  • The interest crediting rate (this is the rate that is used to determine each participant’s defined benefit amount)
  • Ensuring minimum participation requirements
  • Ensuring non-discrimination between the highly-compensated and non-highly compensated employees
  • Determining appropriate asset allocation to minimize disruption of company’s cash flows
  • Develop a cost effective solution so that participants keep more of their hard earned money

Who should consider adopting a cash balance plan as part of their overall retirement plan? Well, anybody, but just to narrow it down a bit:

  • Professional firm with strong and consistent profits and cash flows (owners should be making at least $255,000 per year, consistently)
  • Age discrepancy of at least 10 years (or close) between owners and other employees
  • Firms that already have a 401(k)Profit Sharing Plan with New Comparability (you may already automatically qualify for a Cash Balance Plan)
  • Have a working time horizon of at least 3 years. The IRS does not want companies to use this plan as a short term tax shelter

If you are interested in exploring the idea of adding a Cash Balance Plan to your overall retirement plan, please contact an IFA Wealth Advisor at (888) 643–3133.

1Kravitz, Inc. 2014 National Cash Balance Research Report.