Business owners seek to accomplish these goals by adopting a Cash Balance Plan combined with a 401(k) Profit Sharing Plan, as this strategy could be a cost effective way to maximize benefits for business owners.
For businesses that already have a 401(k) plan, the addition of a Cash Balance Plan is an ideal option to lower taxes and accelerate retirement savings rather than just a standalone 401(k) Profit Sharing Plan. WesBanco Trust and Investment Services can help businesses design a strategy to maximize both contributions to the Cash Balance Plan and deferrals to the 401(k) Profit Sharing Plan.
A 401(k) Profit Sharing Plan is a defined contribution plan that allows eligible employees to make pre-tax elective deferrals through payroll deductions; some plans may also allow for after-tax (ROTH) deferrals. Employers also have the option of making matching contributions based on employees’ elective deferrals, and/or making non-elective (i.e. profit sharing) contributions to eligible employees.
As a defined contribution plan, the employee assumes the investment risks, and the value of the account will fluctuate with changes in the value of the investments the employee has selected. Upon retirement, the employee will receive the balance in the account, which is made up of contributions and investment gains (or losses).
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. Similar to other defined benefit plans, the employer assumes the investment risk, not the employees.
An employee’s account earns a pay credit (i.e. 5% of their salary each year), in addition to an interest credit, which is set at a fixed or variable rate on the account balance. An investment manager invests the assets for the plan. Employees receive periodic statements displaying their hypothetical account balance at retirement.
The benefits that are received are defined in terms of an account balance. The participant can choose to receive an income for life, or take a lump sum benefit and roll it into an IRA or another qualified plan, allowing the participant to retain flexibility over their retirement.
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