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A Financial Planners Guide to Cash Balance Plans

A Financial Planners Guide to Cash Balance Plans. Presented by : Charles Munsell. www.nyhart.com. 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.

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A Financial Planners Guide to Cash Balance Plans

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  1. A Financial Planners Guide to Cash Balance Plans Presented by: Charles Munsell www.nyhart.com

  2. Agenda • Historical perspective • What are cash balance plans? • How do the plans work? • What is the role of the planner? • Real-world examples

  3. Historical Perspective

  4. 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

  5. What is a cash balance plan?

  6. 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

  7. Why a Cash Balance Plan?

  8. 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

  9. How do they work?

  10. How do they work? • Takes advantage of defined benefit nature of plan • Takes advantage of nondiscrimination testing rules • Typically designed with owner focus

  11. Why Defined Benefit? • Limit is on the benefit, not the contribution • Can fund towards target in excess of $2.5 million dollars for principal

  12. How do we not discriminate? • Plan must be non-discriminatory • IRS provides framework for testing • Take advantage of the “miracle” of compound interest

  13. 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

  14. Who is an ideal candidate for a cash balance plan?

  15. 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 WHO TO TARGET?

  16. Why would a client want a cash balance plan?

  17. 3 Why a client wants a cash balance plan: REASONS The contributions are tax deductible. The contributions are tax deductible. The contributions are tax deductible.

  18. Cash Balance Plan 415 Dollar Limits for 2015

  19. 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

  20. What is the planner’s role? • Handle investments • Fiduciary consulting • Plan sponsor education (but no participant education) • Estate planning considerations

  21. 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

  22. Case Study Let’s look at a COUPLE OF SCENARIOS

  23. 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) CASE STUDY

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

  25. Interpretation • 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 circumstances CASE STUDY

  26. 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) CASE STUDY

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

  28. Interpretation • 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 there CASE STUDY

  29. In Conclusion • Cash 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

  30. This concludes our discussion ANY QUESTIONS? Charles Munsell charles.munsell@nyhart.com(317) 845-3570

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