Combination

The combination of a cash balance plan and 401(k) plan is rapidly becoming a popular plan design. Recent legislation has clarified the protocol for setting up these hybrid plans, and the combination with a 401(k) plan allows for higher tax deferred contributions for owners with reasonable contribution amounts for employees. Good candidates for Cash Balance/401(k) combination include professional groups with high profitability and stable cash flow such as attorneys, CPAs, doctors and other medical practitioners. Small, profitable, closely held companies also are likely to fit the profile for this combination design. Anyone wanting to shelter earnings within a qualified retirement plan may find this arrangement attractive.

There are some key points to consider when adopting a cash balance/401(k) combination plan design:

1. A cash balance plan is a defined benefit plan. The contributions are determined based on the formula set in the Plan Document. Contributions are determined actuarially, and can only be changed by amending the Plan. As with all defined benefit plans, the contribution is required and defined benefit plans generally must be in place for no less than five years.

2. Unlike other defined benefit plans, however, the contribution formulas are age-based and can vary by individual or group. Typically, classes can be set up based on years of service at a specified date, ownership status, location, etc.

3. Cash balance plans can be designed with higher contribution formulas for certain employee groups, at rates greater than allowed by a 401(k) plan alone. Cash balance plan contributions could be as much as $200,000 per year. Like other defined benefit plans, these contributions are deductible.

4. A cash balance plan cannot typically pass non-discrimination tests without including 401(k) plan contributions. But, when combined with a 401(k) plan, a cash balance plan can provide retirement benefits for all employees with the flexibility to provide greater retirement benefits to key employees. As a result, even though 401(k) contributions are discretionary, the plan sponsor must look at the 401(k) contributions as required.

Combination Plans FAQ