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Cash Balance Plan vs Profit Sharing?

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  • Cash Balance Plan vs Profit Sharing?

    My group is considering a new cash balance plan.  Our current plan and new plan are detailed below:

     

    Currently, we have:

    401k: 19k

    Profit sharing: 37k

    Total: 56k

     

    New plan:

    401k: 19k

    Cash Balance: 73k

    Total: 92k

     

    Which is better?  Unfortunately our third party administrator said we would have to lose the profit sharing plan in order to do the CBP (too expensive for employee contributions if we maintained profit sharing).

    I am mid 30s, a few years out of training.

    Here is how I see it so far:

     

    Pros of new CBP:

    36k additional tax deferred

     

    Cons of new CBP:

    3% expected returns on CBP

    Do not control money as I would in 401k account

    Asset protection?

     

    Any help is appreciated.

     

     

     

  • #2
    Welcome to the forum!

    Let's go over some pros and cons of the new cash balance plan.  You get to save more money pre-tax.  Asset protection is excellent with ERISA plans (like the cash balance plan), so that's good.

    What isn't good is that you're going to go from $56K that you can invest as aggressively as you want each year to only $19K in qualified funds that you can invest more aggressively than a bond-like 3% return.  The $19K is only ~20% of your new $92K in annual contributions to qualified funds.

    In order to maintain even a 60/40 split between stock and bonds in your annual retirement savings, you would need to an additional $90.5K into taxable investments each year.  Can you comfortably do that with you putting $19K into the 401(k) and your employer putting $73K into the cash balance plan?

    (There are a few caveats.  First, you already have retirement funds in your 401(k) that you can invest more aggressively.  Second, over time we would expect your stock investments to grow more than 3% per year, so the cash balance proportion of your overall asset allocation should shrink.  (Hurrah for paltry guaranteed returns?))

    Personally, I'd vote in favor of the new cash balance plan.  It's a better deal still for older, higher income doctors, but not a bad way to protect more money and lower your tax bill.

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    • #3
      Not so quick on the profit sharing. I don't understand the comment about too expensive for employee contributions. If you are already able to make $37K in contributions, you already have significant staff contribution costs.

      A cash balance plan is going to have significant staff contribution costs. Also, if the cash balance plan covered by the PBGC, profit sharing will be limited to 6%.

      Comment


      • #4
        Might be comparing apples to oranges but our big group has both a PSP and a CBP. How is the CBP run? How often can people get their money out?

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        • #5




          Not so quick on the profit sharing. I don’t understand the comment about too expensive for employee contributions. If you are already able to make $37K in contributions, you already have significant staff contribution costs.

          A cash balance plan is going to have significant staff contribution costs. Also, if the cash balance plan covered by the PBGC, profit sharing will be limited to 6%.
          Click to expand...


          I did have one CBP provider recently tell me that the 6% limit on profit sharing would not apply with “combined testing.” In other words, they told us we could max contribute to a CBP and still max out profit sharing in our 401k. I have not researched further.

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          • #6
            Our small independent group added a CBP along with a 401k/PS last yr. Before the CBP was added, we were able to max out the 401k/PS to $55k (depending on allowable limit). After the CBP, the 401k/PS component was reduced to 35k total and we were able to put in >120k into the CBP (>40 years). Overall, we calculated that our employee contribution cost was 12k per partner. The upside was that each partner was able to save ~45k in taxes (at 37% marginal tax rate on the CBP contribution). This illustration needs to be done by your ERISA advisor and an actuary based on your practice demographics. Maybe you have relatively older employees and younger partners, thereby making the employee contribution costs prohibitively higher. Good luck!

            -PFB

             

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            • #7
              Thanks for the information!

              We do have relatively older employees and younger partners, which may explain the higher costs.  I again asked the TPA if we could maintain the profit sharing with the CBP, and am waiting to hear back.

              Would the new plan: (401k - 19k, CBP - 73k, 92k total), be preferable to the current plan: (401k - 19k, PS - 37k, 56k total)?

              With the current plan, I place about 75k in taxable plus my spouse's 50k in 401k/PS.

               

               

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