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Cash Benefit Plan- Confused!

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  •  scurry 
    Participant
    Status: Physician
    Posts: 44
    Joined: 03/28/2016

    Hi Everyone,

    Was reading a recent post about cash benefit plans and was confused about certain aspects of such plans. Here is some info about me:

    1. 37 years old

    2. Current pretax salary: 400k; Assuming i’ll make partner in 1.5 years, salary will be between 600-700k

    3. max out my 401k (i do a roth); max out profit sharing  (35k); max out HSA; max out backdoor Roth

    4. this year started contributing 50k pretax to a cash benefit plan (i think the max i could contribute was around 80k)

    I was always under the impression that one could have a max of 2.8 million in these CBP plans, but recently after reading a post, I was confused because it stated that if a person is younger, he/she can only have approximately 1.5 million (depending on age). Obviously this is a big difference. I would like to know which one is it and if it’s the lower amount, what is the reasoning for it.

    Also, our group plans on closing the current plan in about 5 years at which time participants can roll their balances into 401ks. A new cbp will then be set up for each participant. Does the lifetime limit of 2.8 million (or whatever that amount is) apply to each individual plan or is it specific to each individual person, assuming the participant is with the same employer? in other words each time  my group opens up a new CBP, can each participant theoretically have 2.8 million in each new plan or is it capped at 2.8 million per person, no matter how many plans are opened.

    Thank you for your help. These CBP confuse me!

     

    #171236 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 792
    Joined: 01/09/2016

    Hi Everyone,

    Was reading a recent post about cash benefit plans and was confused about certain aspects of such plans. Here is some info about me:

    1. 37 years old

    2. Current pretax salary: 400k; Assuming i’ll make partner in 1.5 years, salary will be between 600-700k

    3. max out my 401k (i do a roth); max out profit sharing  (35k); max out HSA; max out backdoor Roth

    4. this year started contributing 50k pretax to a cash benefit plan (i think the max i could contribute was around 80k)

    I was always under the impression that one could have a max of 2.8 million in these CBP plans, but recently after reading a post, I was confused because it stated that if a person is younger, he/she can only have approximately 1.5 million (depending on age). Obviously this is a big difference. I would like to know which one is it and if it’s the lower amount, what is the reasoning for it.

    Also, our group plans on closing the current plan in about 5 years at which time participants can roll their balances into 401ks. A new cbp will then be set up for each participant. Does the lifetime limit of 2.8 million (or whatever that amount is) apply to each individual plan or is it specific to each individual person, assuming the participant is with the same employer? in other words each time  my group opens up a new CBP, can each participant theoretically have 2.8 million in each new plan or is it capped at 2.8 million per person, no matter how many plans are opened.

    Thank you for your help. These CBP confuse me!

     

    Click to expand…

    If you work for this practice for 30 years, you might be able to put away $2.8M.  This is basically the issue for solo Cash Balance plans.  The cost of running a plan is not worth running the plan for 30+ years.  Solo owners max out their plan contributions after 10 years, and thereafter can contribute very little, thus their maximum is lower if they terminate the plan after 10 years.  However, as a partner, plan costs are shared and are minimal, so you will be able to put away the maximum of ~$2.8M but only if you stay with this practice for a very long time.  After about 10 years (if you currently max out), your contributions will become rather small.

    Closing a plan in 5 years is one strategy that I don’t recommend for various reasons, but closing and opening a plan for one practice does not change the limit.  If you were a partner in two practices however, and each one with a CB plan, then theoretically you can have 2 $2.8M limits, one for each. One reason why practices do that is because they don’t know how to properly manage their CB portfolio (it ends up being too risky, so this creates issues for the practice), and also because some seem to think that low returns in a CB plan is somehow a big problem (it is not).

     

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #171253 Reply
     scurry 
    Participant
    Status: Physician
    Posts: 44
    Joined: 03/28/2016

    Thanks for the reply, Kon.

    I dont anticipate contributing more than 80k/year to this plan, so i dont think i will reach the max of 2.8M. Also, i dont anticipate maxing out my yearly contributions, due to cash flow issues. As of now, my group has set the current desired rate of return at 3%.

    Again, thanks for the reply. Best wishes.

    #171508 Reply
     KPInvestor 
    Participant
    Status: Physician
    Posts: 66
    Joined: 10/16/2017

    Scurry,

     

    I am confused because on another thread you said you worked for SCPMG, but on this thread your benefits do not seem to be consistent with what a SCPMG physician would get.

    #171512 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 792
    Joined: 01/09/2016

    Thanks for the reply, Kon.

    I dont anticipate contributing more than 80k/year to this plan, so i dont think i will reach the max of 2.8M. Also, i dont anticipate maxing out my yearly contributions, due to cash flow issues. As of now, my group has set the current desired rate of return at 3%.

    Again, thanks for the reply. Best wishes.

    Click to expand…

    Crediting rate to participants (3%) is actually set by the actuary, and it depends on your practice demographics quite a bit.  Actual rate of return will be determined by the markets (and how the money is invested). You are good to go then.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #171514 Reply

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