A Financial Planners Guide to

Cash Balance Plans

www.nyhart.com

Presented by: Charles Munsell

Agenda Historical perspective

What are cash balance plans?

How do the plans work?

What is the role of the planner?

Real-world examples

Historical Perspective

Historical Perspective

Early 80’s a defined benefit plan was the clear solution for small professional corps

Legislation almost killed them overnight

Subsequent law changes have brought them back

Often not thought of as a solution, lost generation plus

What is a cash balance plan?

What is a Cash Balance

Plan?

A hybrid defined benefit plan

Looks and acts like a 401(k) plan from a benefits perspective

More robust from a funding perspective

Why a Cash Balance Plan?

Why a Cash Balance Plan?

A defined benefit plan

Can be leveraged with 401(k) plan

Combined plans tested as one

Much larger deductions available

Easy to understand

How do they work?

How do they work?

Takes advantage of defined benefit nature of plan

Takes advantage of nondiscrimination testing rules

Typically designed with owner focus

Why Defined Benefit?

Limit is on the benefit, not the contribution

Can fund towards target in excess of $2.5 million dollars for principal

How do we not

discriminate?

Plan must be non-discriminatory

IRS provides framework for testing

Take advantage of the “miracle” of compound interest

Pros & Cons Large contributions

are allowed

Investing for a pool

Benefits are fixed and guaranteed

Favorable Determination letter issued by IRS

× Contributions are mandatory under law

× Contributions could be volatile, based upon asset performance and interest rates

× Government insurance depending upon size and structure

Who is an ideal candidate for a cash balance plan?

• Doctors, dentists, lawyers, business owners and other high income professionals

• Entities with strong cash flow

• Entities looking for tax deductions and willing to save for retirement

• Owners who are older rather than younger

WH

O T

O

TAR

GET?

Why would a client want a cash balance

plan?

3REASONSWhy a client wants a cash balance plan:

1. The contributions are tax deductible.

2. The contributions are tax deductible.

3. The contributions are tax deductible.

Cash Balance Plan 415 Dollar Limits for 2015

Age Limit Age Limit Age Limit

35 $68,369

36 $71,838 46 $117,962 56 $194,048

37 $75,484 47 $123,973 57 $203,968

38 $79,317 48 $130,292 58 $214,397

39 $83,346 49 $136,936 59 $225,362

40 $87,581 50 $143,921 60 $236,891

41 $92,034 51 $151,265 61 $249,013

42 $96,714 52 $158,987 62 $261,757

43 $101,634 53 $167,105 63 $256,128

44 $106,807 54 $175,640 64 $250,416

45 $112,245 55 $184,613 65 $244,579

Any other reasons?

This is a Qualified Plan as defined by the IRS

Assets protected from creditors

Rollover and continued deferral of taxes available upon distribution from plan

Provides a significant retirement benefit

What is the planner’s role?

Handle investments

Fiduciary consulting

Plan sponsor education (but no participant education)

Estate planning considerations

How are the investments

different?

No participant direction of investments

Investments are in a pool and invested for the pool

Goal is not necessarily maximum return

Many plans are structured to reduce volatility

Plans tend to be conservatively invested

LET’S LOOK AT A COUPLE OF SCENARIOS

Case Study

22

• Dr. Martin makes $500,000/yr

• Staff of 3 employees, total payroll = $129,927

• Maximum 401(k) limitation is $53k for 2015

• Typical design would be a 401k safe harbor and new comparability design ($53k max)

CA

SE S

TU

DY

CA

SE S

TU

DY

Name Salary 401k DCCash

Balance Total*Tax

Savings

Dr. Martin $500,000 $24,000 $7,950 $205,800 $237,750 $95,100

Employee1 $61,154 $0 $4,113 $1,500 $5,613 $2,245

Employee 2 $29,023 $0 $4,975 $726 $5,701 $2,280

Employee 3 $39,750 $0 $2,674 $994 $3,667 $1,467

Total Staff $129,927 $0 $11,762 $3,220 $14,981 $5,992

Grand Total

$252,731 $101,092

Percent To Target 94%

*Assuming a 40% tax rate; taxes are deferred only.

– Dr. Martin receives $237,750 contribution rather than a maximum $53,000 contribution to a 401k plan

– 94% of total contribution went to owner

– Tax savings of $101,092 more than paid for employee cost to get there

– Design choices can skinny costs further depending upon circumstancesC

AS

E S

TU

DY Interpretation

• Physician group with 13 partners

• Staff of 10 employees

• Maximum 401(k) limitation is $53k for 2015

• Typical design would be a 401k safe harbor and new comparability design ($53k max)

CA

SE S

TU

DY

CA

SE S

TU

DY

Name 401k DCCash

Balance Total*Tax

Savings

Each Partner

$18,000 -$24,000

$35,000 $51,000 - $250,000

$104,000 - $309,000

Total Partners

$237,000 $440,500 $1,460,700 $2,138,200 $855,280

Total Staff $0 $88,480 $6,300 $94,780 $37,912

Grand Total $237,000 $528,980 $1,467,000 $2,232,980 $893,192

Percent To Target 96%

*Assuming a 40% tax rate; taxes are deferred only.

– 12 of 13 partners receive maximum contribution based upon their age with cash balance plan rather than a maximum $53,000 contribution to a 401k plan

– 96% of total contribution went to the physician group

– Tax savings of $893,192 more than paid for employee cost to get thereC

AS

E S

TU

DY Interpretation

In ConclusionCash balance plans provide large tax benefits to owners

Cash balance plans provide large retirement accounts

Qualified plan with the IRS

Receives a determination letter from the IRS

ANY QUESTIONS?This concludes our discussion

Charles Munsellcharles.munsell@nyhart.com(317) 845-3570