Professional firm cash balance plans

Professional Firm Cash Balance Plans September 21, 2009

It’s a defined benefit (DB) plan
subject to IRS maximum benefit limits
NOT subject to $49,000 defined contribution (DC) maximum deduction
can be used with a maximum DC plan
contributions are not discretionary
What is a cash balance plan?

It looks like a DC plan
has an account for each participant
account grows with pension and interest credits
money paid out is directly related to money paid in
What is a cash balance plan?

Corporate plans: DC look and benefit pattern
Different reasons for professional groups
Want to put away – and deduct - more than $49,000 DC limit
What you receive is directly tied to what you contribute – important for multiple owners
Pension credit formula can be tied to compensation, age, service, title, points, etc.
Corporate vs. Professional Plans

Profit sharing formula
7½% integrated plan, plus
extra for top partners to reach DC maximum
Cash balance formula
Pension credit based on age and partnership percentage
Interest credit based on 10-year Treasuries (3.53% for 2009)
Sample plans

Sample plans $150,000 $800,000 Gross pay $36,513 $6,935 $16,500 (optional) $13,077 $121,674 Partner Age 35 $177,000 $122,500 $22,000 (optional) $32,500 $245,000 Partner Age 55 Total Cash Balance Pension Credit 401(k) deferral Profit Sharing Recognized Pay (net pay)

Plan must include 50 employees or 40% of all employees – with “meaningful” benefits
Need to satisfy cross-testing “gateways”
Limits on the interest crediting rate
Investing to match interest credits
In most cases, participants may not direct the investment of their accounts
Need to keep “funding target” 110% covered to pay lump sums to top 25 HCE’s
Issues to consider

January 2007 guidance for “statutory hybrid plans”, Notice 2007-6
Market rate of return: guidance expected in 2007
“ Preservation of Capital” a tricky issue: §411(b)(5)
Temporary safe-harbor rates
Long-term investment grade corporate bonds, 412(b)(5)
3rd segment yield curve rate, §430(h)(2)
30-year Treasury, §417(e)(3)
Notice 96-8 rates
If plan meets vesting and interest credit rules, then:
No age discrimination problem (prospectively)
No “whipsaw”: lump sum equals account balance
Pension Protection Act (PPA) Changes

Questions? Van Iwaarden Associates 612-596-5961, 888-596-5960 [email_address] www.vaniwaarden.com

Professional firm cash balance plans

by Jim van Iwaarden on Jun 23, 2010

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Professional firm cash balance plans — Presentation Transcript