Qualified Retirement Plans (i.e. - those plans under the guidance of Employee Retirement Income Security Act (ERISA) and the Pension Protection Act (PPA) of 2006) can be used for most business to fulfill a variety of needs. In particular, the PPA of 2006 improved the viability, function, and use of Cash Balance Plans as or in addition to a Qualified Retirement Plan.
Case Study Example: Orthopedic MD Group
Bones Orthopedic Group, LLC is an extremely successful two doctor orthopedic group. Currently, the two doctors, age 62 and 55, own equal shares in the practice and are maxing out their 401(k) Profit Sharing Plan contributions. In addition to the two doctors the practice maintains four other employees.
Objective: Increase Retirement Plan Funding and Possibly Leverage it as a Business Deduction
Solution: Add a Cash Balance Pension Plan
Currently, IRS regulations stipulate that the maximum qualified retirement plan contribution is $49,000 for Defined Contribution plans ($16,500 max for individual 401(k) contributions). In addition, because of discrimination stipulations, most qualified retirement plans can't equalize plan contributions by segregating employees by occupation and age.
A Cash Balance Pension Plan could be a solution for this medical practice.
Cash Balance Plans are hybrid plans that combine characteristics of defined contribution (401(k), Profit Sharing, etc... ) and defined benefit plans (412(e)(3), etc... ). Some of the detail characteristics include: the company funds 100% of the contributions (required annually at pre-determined amounts that can be well beyond the $49,000 defined contribution limit) and manages the plan assets, employees maintain an account balance, and the contributions can be skewed to favor owners or key employees.
Consider this sample Cash Balance Plan Contributions for Bones Orthopedic Group:
MD 1: Age 62, $225K salary - $150K Contribution (67% of salary)
MD 2: Age 55, $225K salary - $150K Contributions (67% of salary)
Employee 1: Age 48, $34K salary - $6.075K Contribution (18% of salary)
Employee 2: Age 35, $30K salary - $5.360K Contribution (18% of salary)
Employee 3: Age 32, $28K salary - $5.005K Contribution (18% of salary)
Employee 4: Age 30, $20K salary - $3.575K Contribution (18% of salary)
By implementing a Cash Balance Pension Plan the two doctors: add $300K to their retirement plans but only have to contribute roughly $20K for their employees (in other words, their share of the retirement plan contributions is 94%), equalize contributions for the two doctors without regard to their age discrepancy, and provide retirement funds for their employees.
In this situation, a Cash Balance Plan could be a good fit. However, please recognize that any company looking into some of the more advanced retirement plans such as Cash Balance Plans should consult with their tax and legal advisor prior to implementation.
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