Cash Balance Plan Illustration
(Provides the Highest Contributions and Tax Deductions for companies with employees)
The contributions for Cash Balance Plan (s) are calculated based on the employees’ ages, compensation, and employee classes as established by the employer. The employer decides the amount or percent of contribution for the owners or key employees and for employees based on various groups. Since this type of Cash Balance plan heavily favors the owners or key employees, it is generally set up in combination with a Cross-Tested 401(k) Profit Sharing Plan so that together they satisfy nondiscrimination testing requirements. Cash Balance Plans work especially well where owners or key employees and some of the other employees are more advanced in age. However, these types of plans can work well for owners of any age. Cash Balance Plans are not subject to the 25% employer deduction or participant contribution limitations.
The following is one example of how a Cash Balance Plan & 401(k) Plan combination can benefit your company. This example illustrates the maximum contribution available for the owner while providing the minimum required contributions for the non-owners in order to pass the required nondiscrimination and participation testing:
| SUMMARY OF CONTRIBUTIONS | ||||||||
| Employee | Age | Compensation | 401(k) Elective Deferral | 3% Safe Harbor Contribution | Profit Sharing Contribution | Cash Balance Contribution | Total | Contribution as % of Total |
| Owner | 55 | $290,000 | $26,000 | $0 | $38,500 | $217,500 | $282,000 | 97.2% |
| Employee 1 | 55 | 63,000 | 1,890 | 2,413 | 1,890 | 6,193 | 9.8% | |
| Employee 2 | 50 | 58,000 | 1,740 | 2,221 | 1,740 | 5,701 | 9.8% | |
| Employee 3 | 45 | 53,000 | 1,590 | 2,030 | 1,590 | 5,210 | 9.8% | |
| Employee 4 | 40 | 48,000 | 1,440 | 1,839 | 1,440 | 4,719 | 9.8% | |
| Employee 5 | 35 | 37,000 | 1,110 | 1,417 | 1,110 | 3,637 | 9.8% | |
| Employee 6 | 30 | 34,000 | 1,020 | 1,302 | 1,020 | 3,342 | 9.8% | |
| Employee 7 | 25 | 36,000 | 1,080 | 1,379 | 1,080 | 3,539 | 9.8% | |
| Total Contribution | $26,000 | $9,870 | $51,101 | $227,370 | $314,341 | |||
| SUMMARY OF TOTAL CONTRIBUTIONS | Total | % of Total |
| Total Contribution for Owner (including deferrals) | $282,000 | 89.7% |
| Total Contributions for Employees | $32,341 | 10.3% |
| Total Contributions & Deduction | $314,341 | 100.0% |
| SUMMARY OF TAX SAVINGS & CASH REQUIREMENTS | ||
| Total Contribution for Owner (including deferrals) | $282,000 | |
| Total Contribution & Deduction | $314,341 | |
| Less: Estimated INCOME TAX SAVINGS | – 141,000 | |
| Net Cash Paid Out | $173,341 | – 173,341 |
| Owner’s Contribution Paid by TAX SAVINGS | $ 108,659 | |
| CONCLUSION |
| Not only is the Owner receiving a contribution of $282,000 by only paying out a net cash amount of $173,341, the other employees are receiving contributions totaling $32,341 without any additional cash outlay after current tax savings. |
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Additional assumptions used in above calculations:
- Total Owner combined Federal & State Income Tax Rate assumed at 45%. You should consult your tax advisor as to the actual tax rates and your actual amount saved.
- Contributions may vary in the future based on actual investment performance, plan provisions, and changes in tax regulations.
- The numbers of participants included in the illustrations were limited for simplicity and comparability. However, all of the plans are able to serve from one to hundreds of participants.