• Client Portal
|
  • Subscribe to Newsletter
  • Request for Proposal
Legacy Retirement Solutions - Third Party Retirement Plan Administration
  • Home
  • About Us
  • Services
  • Articles
  • Resources
  • Contact Us
  • Careers
Legacy Retirement Solutions - Third Party Retirement Plan Administration
  • Home
  • About Us
  • Services
  • Articles
  • Resources
  • Contact Us
  • Careers
  • Home
  • Plan Design
  • The Power of Combining Plans

Categories

  • Administration
  • Plan Design
  • Statutory / Regulatory

  • Plan Design

The Power of Combining Plans

  • Posted on October 28, 2016 by Legacy Retirement Solutions

Download PDF

The design of a retirement plan drastically affects both who benefits under the plan as well as the value of the benefit received by those who do participate in the plan. If your goal is to maximize the retirement benefits provided through qualified plans sponsored by your company as well as to potentially skew benefits in favor of a specific group of employees or give disparate benefits to different groups of employees, a plan design that should be considered is to combine a 401(k)/Profit Sharing plan with a Cash Balance Plan.  Although this design results in the creation of two distinct plans that each require separate administration, testing and plan documents; it also provides an opportunity to maximize the benefits provided under both plans.

If we combine these plans, what are the advantages that can be gained?

As suggested above, the most important benefit of sponsoring both a 401(k)/Profit Sharing and Cash Balance Plans is that you can offer maximum contributions to owners and other worthy employees that exceed the limits of only sponsoring a 401(k)/Profit Sharing Plan.  If the plan is designed correctly and all testing passes, it may be possible to double or triple the benefit attributable to an owner or key employee compared to what they might receive in just a 401(k)/Profit Sharing plan.  Benefit maximization can be used to attract and retain key employees.

Another advantage to sponsoring both plans is the flexibility it provides to allocate different levels of benefits to different groups of employees.  This distinction is routinely based on job description or “highly compensated employee” status.  An example of this disparate allocation methodology could involve a law firm where senior partners receive a greater benefit percentage than junior partners.  Junior partners could then receive a higher benefit than paralegals and so on.  This flexibility is extremely helpful in meeting the benefit goals of plan sponsors who want to both maximize and target the retirement benefits they provide.

This design also can offer significant tax opportunities to a plan sponsor. In this regard, the larger plan contributions associated with this design can enable the sponsor to generate larger tax deductions.  The additional tax savings can enable plan sponsors to provide greater total retirement plan benefits to all of its employees.

Although combining plans presents powerful opportunities, remember that these are qualified retirement plans and must be designed and administered correctly in order to exploit them to their full advantage while avoiding potential compliance pitfalls.

 

Frequently Asked Questions:

 What is a 401(k) Profit Sharing Plan?

A profit sharing plan provides the plan sponsor with the discretion to decide (within limits) how much to contribute on behalf of participants each year, if anything at all. If contributions are made, a set formula must be established in order to determine how such contributions are allocated and such contributions must also be separately accounted for in relation to each employee. Contributions to the plan can be subject to a vesting schedule (which provides that employer contributions become nonforfeitable only after a period of time). In addition, mandatory annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers.

Once your company has decided to sponsor a profit sharing plan, you will have to determine certain plan features – such as which employees will participate in the plan and when. Other features of the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.

By adding a deferral feature to a profit sharing plan, it becomes a “401(k)” profit sharing plan.  This feature allows participants in the plan to defer an elective amount from their own paychecks.  This amount can be designated as pre-tax, Roth or after-tax, as long as the plan document allows for the appropriate type of contribution.

What is a Cash Balance Plan?

A Cash Balance Plan is a Defined Benefit Plan that looks like a Money Purchase Plan.  Like a Money Purchase Plan, fixed contributions are credited to each participant at the end of each year. In addition, participants receive interest credits that are often based on an assumed interest rate defined in the plan. Increases or decreases in the value of the plan’s investments do not directly affect the benefits promised to the participants. The investment risks and rewards are borne solely by the employer. The plan maintains a hypothetical account balance for each participant. When the participant retires, his benefit is the value of the hypothetical account. This lump sum value can also be converted to a monthly pension at retirement.

A Cash Balance plan is also known as a Hybrid Plan. This is because, although it appears to participants to operate as a Defined Contribution Plan, it is treated under the Internal Revenue Code as a Defined Benefit Plan. Regardless, participant statements look like a Defined Contribution Statement with a beginning balance, contribution credits, interest credits and an ending balance.

A Cash Balance plan can be used to skew benefits to a select group of employees.  This can make the Cash Balance design more powerful than a traditional Defined Benefit plan in certain circumstances.

How are investments in a Cash Balance plan managed?

Assets in the plan are not allocated to participant controlled accounts so participants cannot direct the investment of their retirement plan assets. Instead, a pooled account is invested by the Trustees and Investment Advisers on behalf of all participants. Gains (losses) from investments reduce (increase) the Plan Sponsor’s contribution obligations. Since interest credit guarantees cannot exceed a market rate of return, assets may be invested conservatively.

What are the other features of the Cash Balance Plan?

When a participant becomes entitled to receive benefits under a cash balance plan, the benefits are defined in terms of an account balance. For example, assume that a participant has an account balance of $100,000 when he reaches age 62. If the participant decides to retire at that time, he would have the right to an annuity based on his account balance. Such an annuity might be approximately $10,000 per year for life. In many cash balance plans, however, the participant could instead choose (with consent from his spouse) to take a lump sum benefit equal to the $100,000 account balance.

In addition to generally permitting participants to take their benefits as a lump sum benefit at retirement, cash balance plans often permit vested participants to choose (with consent from their spouses) to receive their accrued benefits in lump sums if they terminate employment prior to retirement age. Traditional defined benefit pension plans often do not offer this feature.

If a participant receives a lump sum distribution, that distribution generally can be rolled over into an Individual Retirement Account (IRA) or to another employer’s plan assuming that plan accepts rollovers. This makes Cash Balance plans portable and, as a result, more appealing to participants.

How do cash balance plans differ from traditional pension plans?

Both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life.  However, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement while cash balance plans define the benefit in terms of a stated account balance. As a result, cash balance accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocable to such account.

 

 

 

 

 

 

 

Prev
Tax Credit for Small Employer Start-Up Plans
ADP Test Basics
Next

Recent Administrative Posts

  • ADP Test Basics Corrections
  • ADP Test Basics
  • Form 5500

Recent Plan Design Posts

  • Safe Harbor 401(k) Establishment Deadline
  • Safe Harbor 401(k) Establishment Deadlines
  • Legacy Solo(k) Plans 2016

Recent Statutory / Regulatory Posts

  • Tax Credit For Small Employer Start-Up Plans
  • ADP Test Basics Corrections
  • ADP Test Basics

Archived Articles A-Z

  • A-E
  • F-J
  • K-O
  • P-T
  • U-Y
  • Z-Z

A-E

  • Defined Benefit Plan Year Compliance Package
  • Delay to Deadline for Plan Sponsors to Make Retirement Plan Contributions
  • Department of Labor Releases New Guidance on Missing Participants
  • CARES Act – Retirement Plan Impact
  • Cashing-Out Terminated Employees From Your Company’s Retirement Plan
  • ADP Test Basics
  • ADP Test Basics
  • ADP Test Basics
  • ADP Test Basics
  • ADP Test Basics Corrections
  • ADP Test Corrections
  • Changes to DOL Late Deferral Remittance Enforcement Procedure
  • Changes to 404a-5 Participan Fee Disclosure Requires Additional Notifications
  • Congress Enacts Changes to Hardship Withdrawal Rules
  • Consequences of Failing to Timely Adopt a PPA Restatement
  • Employing the Proper Definition of Compensation
  • Correcting Average Deferral Percentage Test Failures
  • Correcting Average Deferral Percentage Test Failures
  • Are Your SEP Plans Safe From Other Financial Advisors?
  • Are You Ready For Your Next Plan year end?
  • ERISA Bond: What Is It and Do I Need ONe?
  • ERISA Bond: What Is It and Do I Need One?
  • A Plan Administrator’s “Due Diligence” Obligations
  • A Plan for Retirement Plan Compliance 2014
Back to top

F-J

  • Important CARES Act 2020 RMD Rollover Deadline Fast Approaching
  • Form 5500
  • Form 5500 Update
  • Form 5500 Update
  • IRS Creates Permanent Form 5500 Penalty Relief Program for Non-ERISA Plans
  • IRS Expands Retirement Plan Sponsors’ Self-Correction Options
  • IRS Expands Use of Pre-Approved Plan Documents To Cash Balance Plans
  • IRS Grants Form 5500 Penalty Relief for Non-ERISA Plans
  • IRS Grants 401(k) Safe Harbor Suspension Relief
  • IRS Issues Final Regulations on Mid-Year Reduction or Suspension of Safe Harbor Contributions
  • IRS Issues Guidance on Same Sex Marriage
  • IRS Issues Guidance Regarding Uncashed Check
  • IRS Revisits Mid-Plan Year Changes to Safe Harbor 401(k) Plans
  • IRS Provides Guidance on Expansion of In-Plan Roth Rollovers
Back to top

K-O

  • Legacy Solo(k) Plans 2016
  • NAPA Conference
  • New Opportunity In-Plan Roth Conversions
  • Limitations On Mid-Plan Year Amendments To Safe Harbor 401(k) Plans
Back to top

P-T

  • Safe Harbor 401(k) Establishment Deadline
  • Safe Harbor 401(k) Establishment Deadlines
  • Required Minimum Distributions
  • Required Minimum Distributions
  • Required Minimum Distributions
  • Tax Credit for Small Employer Start-Up Plans
  • Tax Credit For Small Employer Start-Up Plans
  • Tax Credit for Small Employer Start-Up Plans
  • Tax Credit For Small Employer Start-Up Plans
  • The SECURE Act – Plan Sponsor Impact – Part 1
  • The SECURE Act – Plan Sponsor Impact – Part 2
  • The SECURE Act – Plan Sponsor Impact – Part 3
  • The Power of Combining Plans
  • The Problem with Using Forfeitures to Satisfy Employer Contributions
  • Plan Sponsors Must Retain Hardship and Loan Documentation
  • Plan Year Compliance Package
  • Plan Year Compliance Packages
  • Solo 401(k) Brochure
  • Treasury Issues Proposed Hardship Withdrawal Regulations
Back to top

U-Y

  • What are “Cash Balance Plans”?
  • What is “New Comparability”?
Back to top

 

 

 

 

Phone: 484-483-1044     E-mail: marketing@legacyrsllc.com     Address: 700 Turner Industrial Way, Suite 110, Aston, PA 19014     Follow Us: LinkedIn

© Copyright 2019 Legacy Retirement Solutions - All Rights Reserved - Design by CrafTech Computer Solutions

 

Links

  • Overview
  • Principals
  • Staff