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A Financial Planners Guide to
Cash Balance Plans
www.nyhart.com
Presented by: Charles Munsell
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Agenda Historical perspective
What are cash balance plans?
How do the plans work?
What is the role of the planner?
Real-world examples
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Historical Perspective
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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
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What is a cash balance plan?
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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
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Why a Cash Balance Plan?
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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
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How do they work?
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How do they work?
Takes advantage of defined benefit nature of plan
Takes advantage of nondiscrimination testing rules
Typically designed with owner focus
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Why Defined Benefit?
Limit is on the benefit, not the contribution
Can fund towards target in excess of $2.5 million dollars for principal
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How do we not
discriminate?
Plan must be non-discriminatory
IRS provides framework for testing
Take advantage of the “miracle” of compound interest
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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
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Who is an ideal candidate for a cash balance plan?
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• 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?
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Why would a client want a cash balance
plan?
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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.
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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
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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
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What is the planner’s role?
Handle investments
Fiduciary consulting
Plan sponsor education (but no participant education)
Estate planning considerations
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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
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LET’S LOOK AT A COUPLE OF SCENARIOS
Case Study
22
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• 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
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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.
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– 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
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• 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
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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.
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– 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
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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