Below CBA answers a few of the most common, and vital questions associated with a Cash Balance Plan. It will provide dentists, owners of dental practices, and dentistry professionals with information about how the Cash Balance Plans CBA designs, operates, and the advantages of using a Cash Balance Plan to help meet your retirement savings objectives.
What Is A Cash Balance Plan?
A Cash Balance Plan is a type of Defined Benefit Plan that operates much differently than other types of retirement plans.
Most of the Cash Balance Plans CBA designs are established for the primary benefit of the owners or executives of a company. Therefore, the contributions for dentists, owners of dental offices and executives are typically very large with a smaller contribution provided to staff to meet IRS requirements.
During the plan design, the sponsoring company selects the amount of contribution for each dentist, owner and executive, up to the maximum amount permitted by law.
Only businesses can sponsor a Cash Balance Plan, but any dental practice or business entity may do so. We provide services for sole proprietorships, partnerships, LLCs, nonprofits, and corporations. Dentists can have zero or more employees to start a plan.
The number of companies sponsoring Cash Balance Plans is growing rapidly.
Among the reasons for such rapid growth are:
- Higher anticipated tax rates for small business owners like dentists, dental offices owners, dentistry employees and other professionals
- The increased number of small business owners who are getting closer to retirement age
- The government's desire to have privately funded pension plans help fund the retirement of America's workers
- The need for larger retirement contributions due to market losses in existing retirement accounts that can't be deducted in Defined Contribution Plans
- The emergence of Cash Balance Plans as an accepted way of controlling Defined Benefit Plan employee cost while still maximizing deductions for the owners.
They generally offer the best of both worlds; the high contribution limits of Defined Benefit Plans with the ease of understanding of Defined Contribution Plans.
HOW DOES A CASH BALANCE PLAN WORK?
A "Hypothetical Account" is established for each participant under a Cash Balance Plan. This is not an account within the plan's trust account. Instead, the plan administrator maintains the accounts; thus, they are referred to as Hypothetical Accounts.
Contributions are credited to these accounts each year in accordance with formulas in the plan document. The accounts are also credited with interest each year based on a rate selected by the plan sponsor.
Typically this rate is a flat percentage between 4% and 5% or it is based on the yield of an index such as the 30 year treasury yield.
When a participant terminates employment, he or she will be eligible to receive the vested portion of their hypothetical account balance. A Participant's vested percentage is determined by the plan document and can be 0% for up to 3 years of service and then must be 100% upon completion of 3 years.
Changes in Participant Contributions
From year-to-year the amounts, which can be contributed, are subject to complex discrimination testing. That is, Cash Balance Actuaries must be sure that contributions made for highly compensated individuals bear a reasonable relationship to the amounts contributed on behalf of individuals who are not highly compensated.
In performing the discrimination test, we are permitted to combine the cash balance contributions with the contributions the company is providing in other retirement plans. The amount of the required contribution depends on employee demographics.
Therefore, the contributions can fluctuate from year to year, but we do our best to minimize those fluctuations and provide a projection of upcoming contributions free of charge to our clients so you can make a change if the contributions for the year are not meeting your company goals.
Restrictions on Changing Participant Contributions
Once a dental employee has worked 1,000 hours during a plan year, the dentists/dental office employer must make a contribution on his or her behalf and cannot amend the plan to lower the amount of the contribution.
This is true even if the participant subsequently terminates employment during the year. For most full time employees, 1,000 hours will be reached for a calendar plan year in June.
For more information about cash balance plans, dentists, dental office employers or other business owners go to CashBalanceActuaires.com/cash_balance_plans.htm.
Or Contact Charlie Steingas by email or call 952.500.8696
- Cash Balance Actuaries, LLC
- 7310 Paulsen Drive
- Eden Prairie, MN 55346