Optimizing Retirement Benefits for Key Employees with a Retroactive Cash Balance Plan
As a business owner or CFO, you know how important it is to attract and retain top talent. One powerful, but often overlooked, tool for rewarding key employees is a cash balance plan, especially when implemented retroactively for the prior year.
What Is a Cash Balance Plan?
A cash balance plan is a type of defined benefit plan that resembles a 401(k) in its individual account statements, but it’s fundamentally a traditional pension. Each participant has a “hypothetical account” that grows annually with employer contributions and interest credits. This allows for significantly higher contribution limits compared to a 401(k), particularly for older or higher-compensated employees.
Why Consider a Retroactive Plan?
If your company didn’t implement a cash balance plan last year, you may still be able to adopt one retroactively. This means contributions for the prior year can be made now, providing a unique opportunity to accelerate retirement savings for your executives while also potentially lowering your current-year taxable income.
Illustrative Example
Let’s say your company wants to reward a 55-year-old key employee with a $250,000 salary. Using a retroactive cash balance plan, you might be able to contribute up to $150,000 as a hypothetical example for the prior year. This far exceeds the $23,500 limit for a 401(k). This not only provides a meaningful boost to the employee’s retirement but also creates a tax-deductible expense for the business.
The Deadline for Retroactive Adoption
A cash balance plan can be adopted retroactively up to your company’s tax-filing deadline, including extensions, for the previous year. For most corporations, this means you can establish the plan as late as October 15 if you file for an extension. This flexibility allows business owners to evaluate year-end profits and cash flow before deciding on contributions.
Benefits at a Glance
• Increased Contributions: Retroactive contributions can be substantial, particularly for key employees.
• Attract and Retain Talent: Competitive retirement benefits are a strong incentive for top performers.
• Tax Advantages: Employer contributions are generally tax-deductible.
• Predictable Growth: Interest credits provide stable, predictable growth regardless of market fluctuations.
Considerations
• Cost and Funding: Retroactive contributions can be significant; ensure cash flow can support the plan.
• Complexity: Administration is more intricate than a 401(k), often requiring actuarial expertise.
• Employee Communication: Key employees benefit most; clear communication is critical to avoid misunderstandings.
Is a Retroactive Cash Balance Plan Right for Your Business?
If you want to reward high-performing employees, increase tax-deductible contributions, and potentially catch up on last year’s savings, a retroactive cash balance plan is worth exploring.
Next Steps
Work with a qualified retirement plan advisor to evaluate if this strategy fits your company’s goals and financial position. Acting before the tax-filing deadline ensures you don’t miss the opportunity to supercharge your retirement plan for key employees.
Scott Higgins | AIF ®, CFP®, CPFA®, NSSA®
Financial Advisor
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