Small Business Owners Can Help Boost Retirement Savings by Implementing a Cash Balance Plan

Small business owners understand the importance of people.

Having the right employees to further your companies’ goals and create the best customer relationships, product or service they can is crucial for long term growth and profitability. 

Starting an S corporation is not as difficult as one might think. Since S corporation status is only a tax classification created by the IRS to help small businesses, LLCs and corporations can both become S corporations. For more information, consider this resource explaining the process of starting an S corporation in Florida.

With the rise of an increasingly competitive labor market, small businesses must optimize themselves to attract new employees as well as retain employees over a long period of time. One of the most important aspects of a benefits package that prospective employees will be looking for is a comprehensive retirement savings plan. 

Many employers offer a retirement plan as a part of employment, especially plans such as a 401(k) or a 403(b). These plans are excellent choices for businesses looking to benefit their employees and save on taxes. For small businesses, a cash balance plan could provide a better retirement savings plan for employees as well as provide tax benefits to the business. 

Before implementing a cash balance plan into your business’s retirement savings processes, it is crucial to understand both what a cash balance plan is, as well as how a cash balance plan can benefit your business and its employees.

What is a Cash Balance Plan?

A cash balance plan is similar to a 401(k) plan with some distinct features that separate it from other retirement plans. Rather than being a defined contribution plan, such as a 401(k), a cash balance retirement savings plan is defined as a qualified retirement plan that is a form of a defined benefit plan.  

The benefits are calculated using formulas, and employees under a cash balance plan have a certain benefit at retirement. The formulas are commonly based on the percentage of the employee’s earnings and a rate of interest attached to that contribution will provide the employee and employer a predetermined amount at retirement, usually as a lump sum. 

The crediting rate involved in a cash balance plan is guaranteed by the employer and is independent of the plan’s investment performance. In some cases, the employer is required to purchase insurance from the Pension Benefit Guaranty Corporation (PBGC) because the organization is issuing a guaranteed benefit. Professional service firms with 25 or fewer employees or plans that only cover the business owner are exempt from this requirement. 

While employed, employees are not able to dictate the direction of the investment of their account. Assets in a cash balance plan are pooled and invested into various assets. Even if the plan’s portfolio returns are below the crediting rate, any shortfall of the portfolio at the time the plan is terminated must be paid by the sponsor of the plan, or employer. 

Benefits of Cash Balance Plan

It is important for all businesses, regardless of size, to look for ways to help their employees save for retirement. A cash balance plan can be especially beneficial for small businesses for a variety of reasons. It is important to note that a cash balance plan can be a standalone plan, or it can be set up along with a 401(k) plan to allow employers and employees the maximum benefits of both plans.  

The contributions made to a cash balance retirement plan by employees are tax deductible to the company. Growth in the plan is also tax deferred until the money is withdrawn. As employees age, their contribution limits increase. A cash balance plan allows participants to contribute a much higher balance than a 401(k). This can be particularly beneficial in hiring and retaining employees that are looking to move up the food chain in the business to a higher income, or business owners that have a large yearly income. 

Cash balance plans also allow for a higher saving ability for the business. For small business owners, this is attractive for business owners not satisfied with their returns or contributions limit of a traditional 401(k). Due to the rising contribution limits as employees age, cash balance plans are particularly attractive to older business owners looking to make larger contributions to make up for a lack of contributions when they were younger or had just started their business. 

Is a Cash Balance Plan the Right Fit for Your Business?

If your business is looking to start a retirement savings plan for its employees, or it is looking to optimize its already existing retirement savings plan, it is important to understand the considerations of your options. 

Unlike a 401(k) plan where financial risk is carried by each participant, a cash balance plan moves the investment risk to the employer. Contributions will grow at a predetermined rate because the benefit is defined to the employee. Commonly the percentage of growth is set at 4% or 5% annually. Ideally, the pooled assets involved in a cash balance plan will realize a rate of return at or higher than the defined benefit given to employees set by the employer. 

Understanding if a cash balance retirement savings plan is right for your business can be broken down to a few crucial points. Most candidates of a cash balance plan are employers looking to maximize tax benefits and retirement savings ability past the limits of traditional 401(k) plans.  

Medical groups and law firms are a common candidate for cash balance plans, but cash balance plans are not limited to any size or industry of a firm. Any business with sustainable income looking to optimize their retirement savings can open a plan. 

Small businesses, especially, have experienced positive results from utilizing a cash balance plan. Kravitz research found that 92% of cash balance plans are utilized by firms with less than 100 employees, and 59% had fewer than 10 employees. Kravitz, Inc research also found a 15% increase in new cash balance plans and a 30% rise in employer contributions.

Cash balance plans can also be helpful for self-employed individuals trying to plan for retirement. If you or your business are looking for more information and additional resources regarding a cash balance retirement link, visit this link to Fragasso Financial Advisors, where their experts are happy to discuss the possibility of implementing a cash balance plan for your company.

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