Often, business owners search for ways to capitalize on their time, their output and their sales. Many times they discover themselves busy organizing and operating their company, while failing to allocate time to plan a successful departure. Due to this, cash balance plans are becoming a popular way for business owners to increase their retirement funds.
What Is A Cash Balance Plan?
A cash balance plan is a type of defined benefit plan. It is frequently referred to as a hybrid plan since it combines certain features of a defined benefit (pension) plan and a defined contribution (401k) plan.
Cash balance plans became popular during the 1990’s because they were easier to understand and manage than traditional defined benefit plans. However, these plans faced considerable controversy until the Pension Protection Act of 2006, which helped make these plans much more attractive.
How Do They Work?
Cash balance plans incorporate many of the features of defined contribution plans and are subject to the same IRS requirements as defined benefit plans, but with higher contribution limits. Cash balance plan assets are protected from creditors and grow tax deferred. As in any pension plan there are cash balance plan pros and cons that you should be aware.
These plans offer substantial flexibility for determining who is covered by the plan and what level of benefits are offered. Often, traditional plans determine retirement benefits using an average of earnings during the last few years of employment, while cash balance plans do not give as much weight to the last few years, they look at the entire earnings history.