Is My Business Right For a Cash Balance Plan?

Institutional Asset Management | Business Strategy | Small Business Strategy | Small Business Planning | Business Retirement Planning | Business Partnership Planning | Cash Balance Plan

 Matt Baisden By: Matt Baisden

I wrote a piece about what a Cash Balance Plan is recently, which you can find here. The natural question after reading that is “Is my business a good candidate to set up a Cash Balance Plan?”

Below are a few indicators I look for to determine if a business is a good candidate:

Owner-Only Businesses

If you run your own business, are part of partnership, or run a business with your spouse and have no employees you might be an ideal Cash Balance Plan candidate. Much of the cost and complexity is mute for you. The question then becomes how much you want to save. A Solo 401(k) or other retirement plan option will make sense if you want to save $60,000 or less. If you want to save more than $100,000 annually, a Cash Balance Plan is likely be your best option.

We have seen this work for real estate agents, technology consultants, and well-known creatives. The ability to monetize personal brand for creatives - which has exploded as Patreon, Substack, Twitter’s Tip Jar and other payment platforms have been built out - has made this a real possibility for well-known content creators.

15 Employees: 1 Owner Ratio

If your company has employees, your employee to owner ratio likely must be 15:1 or less for a Cash Balance Plan to work. A Cash Balance Plan requires contributions to employees – so while an owner’s ability to save is much larger, employee contributions may overwhelm the benefit.

We have a client who was an ideal Cash Balance candidate except for his employee to owner ratio. He had 50 employees in his business. While a Cash Balance Plan gave him the ability to save nearly $250,000, he would owe each employee an extra 2% contribution. That cost overwhelmed his benefit. If his business had more owners who would all get the benefit, and the cost was split between them, a Cash Balance Plan likely would’ve made sense.

Stable Cash Flow

A Cash Balance Plan requires some level of commitment so you should have confidence you’ll be able to fund the plan for about 3-5 years. If you are already maxing out your 401(k) plan, adding a small Cash Balance piece on top can be an effective way to dip your toes in the water.

If you aren’t saving the maximum of about $60,000 into your 401(k) as a business owner yet. That should be your first step before reviewing a Cash Balance Plan.

Age Disparity

Businesses owners likely need to be older, on average, than their employees for a Cash Balance Plan to make sense. We had a client recently who was an ideal Cash Balance candidate, except for the fact that he was much younger than his employees. That limited how much he could put into the Cash Balance Plan and exacerbated contributions to employees.

These are the top things I look for to determine if a Cash Balance Plan makes sense for a business.

Next Steps:

If you are reviewing a Cash Balance Plan, or want to start out by maximizing your 401(k), our team can design a customized plan for you. Contact me at matt@plancorp.com, call me at 314-392-4630 or schedule a meeting with me here.

Plancorp has helped lots of business owners, and I welcome the opportunity to find out if we can assist you and your company as well. 

Additional Resource:

Click the download button on the image below to receive our Free Guide to Find the Right Retirement Plan For Your Small Business, and to gain an understanding of the different retirement plan options available that meet your personal and business goals.

retirement plans for small businesses

Other Small Business Resources:

Disclosure:

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Related Posts

With four years’ of portfolio management experience under his belt, Matt came to Plancorp in 2016 to join our Retirement Plan Advisors practice. He loves helping business owners build retirement plans that make their companies stronger and give owners the ability to retire when they want. More »