A Cash Balance Case Study

Dave and Cindy, partners in a law firm, came to us looking for help. Dave had owned the practice for several years, while Cindy was a new partner. Both were interested in accumulating wealth for retirement, but they recognized that they were in different places in life.

Scenario 1

We started our discussion with their existing Safe Harbor 401(k) profit sharing plan. By defining each individual as their own “group” we could allocate the maximum to both Dave and Cindy. Since Dave is over 50 years old, he is allowed a catch-up contribution of $5,500. The cost is 7.5% of compensation to the employees. This resulted in 81% of all employer money allocated to Dave and Cindy.

Safe Harbor 401(k) Profit Sharing Plan

Scenario 2

Dave really wants to put away more than the defined contribution maximum. Based on the demographics, we found that we could add a cash balance plan and define a contribution credit of the lesser of $125,000 or 50% of compensation for Dave. Along with this, we have a cash balance credit for the staff of the lesser of $1,500 or 3.5% of compensation (total cost is just under $10,800). At this point, we did not include Cindy in the cash balance plan. This resulted in 87% of all employer money allocated to Dave and Cindy.

Added Cash Balance Plan

Scenario 3

Finally, Cindy decides that she wants to participate in the cash balance plan. Without further increasing the staff cost we find that we can define a contribution for her of the lesser of $6,500 or 4% of compensation. This resulted in 87% of all employer money allocated to Dave and Cindy.

Both Owners in Cash Balance Plan

Dave and Cindy are very happy with the progression of their plan design. Cindy understands that if she wants to cut back her contributions in a given year, she may simply reduce her deferrals or her profit sharing allocation.

Every company is unique, as are their retirement needs. Our consultants at Pinnacle Plan Design will sit down with you and will listen to your questions, desires, and concerns and will design a plan or plans that will best suit your needs. Please contact us for more information.

* Assumes 34% company tax rate & 38% owner individual tax rate
** Profit Sharing amounts include safe harbor non-elective contributions
Plan Designs are for illustration purposes only.
Any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties under the Internal Revenue Code or applicable state or local tax law provisions.