Defined Benefit Plans
Cash Balance Plan
Unlike traditional Defined Benefit Plans, Cash Balance Plan benefits are expressed as account balances similar to the style of a 401(k) Plan. This ultimately makes it easier for plan sponsors and participants to understand their “defined benefit”. A Cash Balance Plan consists of annual pay credits, per participant, per year. These credits accumulate interest at a predefined rate. Owners and their employees may receive different pay credits, but the amount for each participant is always defined in the plan’s document, and the pay credits may either be a flat dollar amount or a percentage of pay. It is important to note that the cash balance accounts will always be credited with interest whether or not the assets in the trust account generate returns. Generally, the liability in the plan is the sum of the cash balance accounts.
Traditional Defined Benefit Plan
Defined Benefit Plans provide a fixed, pre-established benefit for employees at retirement in the form of a monthly annuity that is typically a percentage of compensation. As participants in the Plan work longer and their pay increases, their Defined Benefit grows. Upon termination, the final benefit is calculated and the participant is offered a lifetime annuity payable at the Plan’s retirement age (e.g., age 62 or 65) or a single sum payout that is actuarially equivalent to the monthly payment stream. In almost all cases, the single sum payout is chosen.
Retirement plans fall into one of two categories: Defined Contribution (401(k) Profit Sharing) Plans and Defined Benefit Pension Plans. Pairing a Defined Contribution Plan, such as a 401(k) Profit Sharing Plan, with a Cash Balance, or traditional Defined Benefit Plan offers the simplicity of a 401(k) Plan and the large tax deduction of a defined benefit plan at the same time. Owners and key employees can accelerate their retirement plan funding while minimizing required benefits to younger employees. The most common combo design here at Nova is a Cash Balance Plan and a 401(k) Safe Harbor Profit sharing Plan.
Combo Plans work best with the following:
- Older highly compensated owners who are looking to hyper-fund their retirement accounts
- Successful business with steady profits looking for large tax deductions
- Younger group of employees on average
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