Cash balance plans can save business owners $200,000 per year in taxes per owner. Or more. They combine the simplicity of defined contribution plans like 401k's with the much larger contribution amounts of defined benefit pension plans. They can be designed to be virtually risk free. No wonder they continue to grow in popularity.
Who are cash balance plans for? Generally, they are well suited for any small to medium sized private business that generates substantial profits. 90% of cash balance plan sponsors have less than 100 employees, according to form 5500 Department of Labor filings. There were 10,609 cash balance plans with over 25 employees through the 2019 tax year, according to consulting firm October Three and Plan Sponsor. Impressively, cash balance plans grew by 336% over the past decade.
Considering that real estate investors are tax savvy, it is not surprising that the fastest growing adoptees of cash balance plans were in construction (+165%) and real estate rentals (+126%).
Among cash balance plan sponsors, two reasons cited for their popularity are:
1) Portability - employees love that they can take their cash balance plan balance with them when they change jobs. Their balance can be converted into an IRA and invested however they want.
2) Recruitment - cash balance plans are a great way to incentivize highly skilled, talented, and well paid (highly taxed) individuals. The plans are very popular with law firms and doctor groups. Differentiating your firm with a cash balance plan helps demonstrate to new recruits how much you value them. Further, it's appealing to a new hire to know that the program is designed to create $3M in new wealth for them over the next decade. That's a very easy to understand and attractive retirement program.
Cash balances continue to grow in popularity. Is your firm a good candidate to create one?