Top Reasons Why You Should Consider a Cash Balance Plan

Top Reasons Why You Should Consider a Cash Balance Plan

Did you know a recent research report indicates that the number of new Cash Balance plans increased 17% outpacing the 3% growth of 401(k) plans? Moreover, 92% of the cash balance plans are sponsored by companies with less than 100 participants.

What is a Cash Balance Plan?

A cash balance plan is a defined benefit plan in which an employer credits a pay credit and an interest credit to the participant account. It also allows employees to contribute more toward retirement than with only a 401(k) plan or other retirement plans for small businesses.

Here we have listed a few reasons to add a cash balance plan to your plan services.

  • Cash balance plans are experiencing over 20 percent growth per year, while the 401ks are a mature market, growing at about 2 percent per year.
  • Employers and key employees can accumulate more for retirement and reduce current taxes.
  • Even though cash balance plans have higher administration costs, the tax benefits of investing six-figure annual contributions into cash balance plans can offset this additional administrative cost.
  • Cash balance plans are easier to understand than a traditional defined benefit plan.
  • Cash balance account values can be distributed or rolled over to another employer-sponsored plan which makes them more portable than a defined benefit plan.

But, cash balance plans are not right for all companies since the plan must be funded on an annual or more frequent basis. The employers choosing this plan should have a stable cash flow and profitability to meet its funding requirements. Talk to your 401k plan administrator to know more.

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