Cash Balance Pension Plans

Cash Balance just might be the most exciting plan design to ever come along. It has been around for a few years but was made feasible for a small business by the Pension Protection Act of 2006. The PPA legislation actually describes it as a "Hybrid" plan. Cash balance earns this description because it has both defined benefit and defined contribution features.

Defined Benefit Characteristics:

• Benefits must be definitely determinable and stated in the plan document
• Contributions are required annually at the stated level
• The plan sponsor assumes the investment risk (no participant direction)
• Defined Benefit 415 limits apply

Defined Contribution Characteristics:

• Participants have an account balance
• Contributions and interest are added to the account annually
• Contributions can be skewed by class to favor owners and key employees

There are a number of features related to cash balance plans that make them both easier and harder to understand. The contribution and the interest that will be credited to participants' accounts must be guaranteed by the plan. Unlike a 401(k) plan, participants do not get to direct investments in their accounts. Since the plan sponsor must guarantee the interest credit to the accounts, if the plan's investments earn less than the promised rate the employer must make up the difference. Conversely, if the plan earns greater than the promised rate the excess amount would reduce the employer's future required contributions. This is exactly the opposite of what we have become accustomed to with defined contribution plans, where the actual rate of return is exactly what is credited to the participants' accounts.

The exciting features of a cash balance plan include the fact that the defined benefit contribution limit can be used for the owner rather than the $46,000 defined contribution limit and the fact that contributions can be skewed in favor of the owner by creating classes of employees as we have become familiar with in new comparability plans. This allows us to create an "efficient" plan design by providing the maximum contribution for the owner while making lower contributions for the other employees. From a contribution standpoint, a cash balance plan can be looked at as a new comparability profit sharing plan without the $46,000 contribution limit for the owner class.

Another unique feature of a cash balance design is that a business is allowed to make the exact same contribution amount for all of the members of the "owner" class of employees. This means if we have different age owners they can still receive the same contribution amount. That is often not possible in most other plan designs, but is most often what the small business owner is looking for.

Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k. Or visit our website at www.ifc401k.com

2008 IRS Limits on Benefits and Compensation

This is a summary of the various limitation adjustments that affect
qualified plans for Plan Year 2008:

Qualified Plan Compensation Limit $230,000

401(k) Plan
Maximum elective deferral limit $15,500
Catch-up limit (age 50 and over) $5,000

Defined Contribution
Section 415 annual addition limit $46,000

Defined Benefit
Section 415 annual benefit limit $185,000
Section 415 monthly benefit limit $15,417

Highly Compensated Definition
Compensation test $105,000

Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k. Or visit our website at www.ifc401k.com

What is a Defined Benefit Plan?

A defined benefit plan is a pension plan. It is a "promise" of future benefits. The plan sets a specific benefit at retirement. For example, the plan may establish a benefit of "50% of salary at age 65". The salary defined may be the average of the final five years of salary before retirement. Thus, the plan is specifically targeting a set benefit and promises to supply this benefit for the life of the participant. The type of annuity benefit is also defined in the plan. It may be defined as a joint and survivor annuity with 100% of the benefit being paid to both spouses as long as they both live. It may be a "10 years certain" annuity with the benefits payable to the participant for life with 10 years of payments guaranteed even if the participant would die within the first 10 years. Various options are available including a cash payment at age 65 in lieu of an annuity payout.

The main consideration is the plan must make sure it has enough funds at any point in time to pay the benefits of all participants. To verify the plan is properly funded, an actuary must calculate the funding necessary to assure the plan benefits can be paid. The maximum benefit limit that may be promised is 100% of salary at the normal retirement age. Whatever funding is necessary to assure this benefit is allowed as a deduction for that year. There is no limit on the contribution, only a limit on the benefit funded. For the year 2006, the maximum benefit limit is 100% of salary to a dollar maximum of $175,000 annually.

A business providing a defined benefit plan must feel secure in its ability to continue funding the plan at the proper levels to assure the benefit payments to all participants. Regardless of financial circumstances, the business must fund the plan. Each year, the plan actuary verifies the plan is properly funded and this is communicated to the government in required annual reports.

A 412(i) fully insured defined benefit plan is a variation of the defined benefit plan. This type of defined benefit plan is subject to different funding requirements, which may mean a higher required contribution, level for the same benefit as a traditional defined benefit plan. The plan funding is required to be in insurance company life and annuity products that ultimately guarantee the plan benefit.

Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k. Or visit our website at www.ifc401k.com