There are two general types of pension plans — defined benefit plans and defined contribution plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee’s retirement account.

In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account. A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.

In a typical cash balance plan, a participant’s account is credited each year with a “pay credit” (such as 5 percent of compensation from his or her employer) and an “interest credit” (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).

Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance.

For example, assume that a participant has an account balance of $100,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity based on that account balance.

Such an annuity might be approximately $8,500 per year for life. In many cash balance plans, however, the participant could instead choose (with consent from his or her spouse) to take a lump sum benefit equal to the $100,000 account balance.

If a participant receives a lump sum distribution, that distribution generally can be rolled over into an IRA or to another employer’s plan if that plan accepts rollovers. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected within certain limitations by federal insurance provided through the Pension Benefit Guaranty Corporation.

In theory it does not matter. When you are a sole proprietor, the defined benefit plan calculation is a more complex calculation that is based on your business income.

But for an S-Corp or C-Corp, it is just based on your W2. With a corporation, you have a little bit more control of your contribution because you can increase or decrease your compensation (assuming you meet reasonable compensation). It is easier for us to determine your annual contribution under an S-Corp or C-Corp structure. But at the end of the day, your business structure is between you and your accountant.

Your contributions are determined by our actuary. It depends on your age and income (or business profit if a sole proprietor). For years subsequent to plan set up, you will typically be given a range for you to contribute. You would decide the amount to pay and let us know.

If you choose to pay on the low end it could result in a slightly higher range in following years. Of course, if you paid on the higher end it could result in a slightly lower range in following years. We reach out to our clients in the fall to see how their year is going and what they anticipate their income to be. That way we can do plenty of planning before the year is up.

A cash balance plan doesn’t really have an annual contribution limit like a 401(k). This is because it is trying to reach a specific amount upon retirement (typically at 62 years old).

Contributions toward a cash balance plan can be as high as $300,000 as the participant nears retirement age, subject to their level of income. But here is an important point to note. In reality, even though your target contributions will change each year you will be given a range.

For example, your targeted contribution may be $150k, but you may have a low-end range of $75k and a high-end range of $400k. This gives you a little flexibility each year.

There is no defined period of time that your plan is required to be open. However, the IRS does consider these plans to be permanent. The IRS assumes the plans will operate indefinitely or at least for “a few years.”

The IRS regulations do not clearly define what “a few years” truly means. But generally speaking, the IRS has not typically questioned a plan termination that happened more than 10 years after inception. In addition, employers that terminate a plan within 5-10 years have normally not had a problem.

But if you want to terminate your plan, just make sure that it’s a business necessity. A business necessity would usually involve lower business profits, change in ownership, or an issue that restricts funding the plan. The IRS has even accepted the fact that a company adopted a different retirement plan as a valid reason to terminate.

For most clients it boils down to the following:

1) How high is your tax bracket and how sensitive are you to taxes? If you are in a 40% tax bracket these plans make a lot more sense compared to a 20% tax bracket. You just have to determine where your comfort level is.

2) How much is your annual contribution and how much of the contribution is being allocated to you? If you want to do $100k plus annually and you can get 85-90% allocated to you (compared to your employees) then it may make more sense.

3) How comfortable are you to committing to a plan for a few years? These plans are permanent in nature, but you can terminate after a few years for reasonable cause. Terminating after a few years is usually not much of a problem, but you need to realize that these plans will require an annual contribution.

Fill out our online form in “Services” and get a free assessment.

Once you complete our new plan checklist, it usually takes us around 3-5 business days to get a plan established. Although in many situations, we can have a plan set up in as little as 48 hours depending on time of year and plan complexity.

We will make all plan documents available in your member account. This is where we are securely storing copies of your plan documents and annual reports for you to access at your convenience.

When a plan is set up, you will receive the following documents:

Adoption Agreement

Plan Document

Consent of Action

Summary Plan Description

Participant Highlights

Beneficiary Designation (You will need to print, fill this item out, and return a copy to us for our records)

IRS Advisory/Opinion Letter

Plan EIN

You may work with your own accountant and use 1099TaxGenius for plan creation and administrative services. We offer our tax services as a bundle due to the complexity of layering in these plans. You are free to use whichever tax services you wish.

While most accountants and CPAs understand qualified plans, they may not be that familiar with defined benefit plans.

We have included a few things your accountant will need to be aware of:

1) These plans are qualified plans and have an IRS approval letter. You should share the plan documents with your accountant.

2) You have the ability to make the contribution up to the date you file your taxes (including extensions) and take a tax deduction on your prior year’s tax return.

3) Your plan contributions can be reported in a couple places on your tax return depending on your entity structure.

Where cash balance plan and other defined benefit plan contributions are reflected on your tax return depends on your entity structure. Our clients set them up under the following entity structures:

1) Sole proprietor or single member LLC (Schedule C to 1040 return)

2) Partnership (Form 1065)

3) S-Corp (Form 1120-S)

4) C-Corp (Form 1120)

Our initial bill will include set up fees depending on the service you choose.

We send our administration invoices in April of each year. This invoice covers the annual administration for the prior year. Here are the following timelines and deadlines to consider:

Invoices will go out on approx. April 15th for the prior year administration. For example, you will be billed in April 2024 for the 2023 plan year.

You will have 45 days to pay. Emailed invoice reminders will go out every two weeks. For example, you would be billed on April 15th and receive a reminder on May 1st, May 15th and so forth.

A late fee of $50 will be assessed for each month the invoice is open starting on June 1st. So, if you pay the invoice during June you will have a late fee of $50, July late fee is $100, August $150 and so forth.

Please also realize that payment must be received before July 31st if you want us to file an extension for your IRS Form 5500 filing.

Neither of the terms Irrevocable or Revocable trust apply to your retirement plan, because those terms are for personal trusts. The 401(K) and Cash Balance plans are set up through your entity, and these plans do have some similar qualities to both the irrevocable or revocable trust functions. However, your plans can’t actually be labeled as either.