Owner Tax Strategies: A Cash Balance Plan

Like most business owners, you’re likely exploring ways to strategically grow your revenue, increase profits, and minimize taxes. These are common goals. As your cash flows increase, you may find yourself increasingly focused on ways to reduce your growing tax burden. Often, we explore sensible capital expenditures and/or business reinvestments that align with your strategic goals. But sometimes, business owners could benefit from strategies to accumulate additional personal assets and to reduce taxes.

Depending on your specific criteria, a Cash Balance Plan could be a powerful tool to achieve these objectives.

What is a Cash Balance Plan? It’s an ERISA-based hybrid plan, a unique blend of a company-funded Defined Benefit Plan and Money Purchase Plan. To plan participants, it resembles a Defined Contribution Plan (i.e., 401(k) plan), but the IRS treats it as a Defined Benefit Plan. These plans can operate alongside your 401(k)/ Profit Sharing Plan, offering an additional tax-deferral strategy for accumulating retirement assets.

Cash Balance Plans are effective tax-qualified retirement funding vehicles designed to help business owners aggressively accumulate retirement assets. They are particularly beneficial if you have fallen behind on your retirement savings goals.

Like a Money Purchase Plan, a Cash Balance Plan has fixed contributions for each participant each year. Additionally, plan participants receive interest credits based on the established interest rate defined in the plan. Often viewed as a feature of flexibility, an increase or a decrease in the value of the investments within the plan does not affect the benefits promised to the participants. Gains and losses from the plan’s investments reduce or increase the plan sponsors contributions. The employer oversees the risk/reward design of the investments with the assistance of a professional investment advisor. A portfolio is designed for reasonable and relatively stable long-term growth.

Here are some potential benefits for the business owner:

1.    Significant tax savings. The funds contributed to the plan in the first year of implementation are tax-deductible and considered an ” above-the-line” deduction. Also, employees with high earnings may be able to accelerate their savings. Administration fees may be tax-deductible.
 

2.    Protection of assets from creditors. The Cash Balance Plan is a tax-qualified ERISA plan, so it is protected from creditors.
 

3.    The plan can help attract and retain valued employees. Many younger employees may find an employer-funded retirement plan attractive.
 

4.    Cash Balance Plans can help business owners accelerate their retirement savings. In 2024, the potential contribution to a Cash balance plan can be $376,000 (for participants aged 66 -70 and in a top income bracket). See the table below for contribution limits and potential tax savings.