When Should Companies Consider a Cash Balance Plan?

Cash balance plans are compelling for companies looking to enhance their retirement benefits while enjoying substantial tax advantages. However, they aren’t suitable for every business. Here’s a comprehensive look at when cash balance plans make the most sense—and why.

What are cash balance plans?

Cash balance plans are defined benefit plans that blend the traditional features of pensions with the flexibility of 401(k) plans. Though not as widely recognized, these plans can provide substantial savings and tax benefits for both companies and employees.

How do cash balance plans work?

• Contributions: Unlike a 401(k), where employees contribute, and employers may match, Cash balance plans are entirely funded by the employer. Contributions are based on a formula specified in the plan document, often considering factors like the employee’s age, tenure, or salary.
• Guaranteed rate of return: The investment portfolio is professionally managed to achieve the plan’s guaranteed rate of return. Employees receive this guaranteed amount upon retirement, regardless of investment performance, offering predictability and peace of mind.

What are the benefits of cash balance plans?

Favorable tax treatment

Employer contributions are tax-deductible, reducing the company’s taxable income. For employees, contributions and earnings grow tax-deferred until retirement, when withdrawals may be taxed at a lower rate. This dual-plan structure amplifies tax advantages when combined with a 401(k).

Higher savings potential

In 2024, the maximum contribution for a 401(k) plan was $23,000 (plus an additional $7,500 for employees aged 59.5 or older). By comparison, Cash balance plan contributions ranged from $79,000 to $376,000, depending on employee demographics. Pairing a 401(k) with a Cash balance plan allows employees to save between $148,500 and $452,500 annually, far exceeding the 401(k) limits.

When should companies adopt a cash balance plan?

When enhancing retirement benefits is a priority

If your company already offers a 401(k) plan and wants to go further in providing competitive retirement benefits, adding a Cash balance plan can make your benefits package stand out—particularly for high-income earners.

When your business has a stable cash flow

Cash balance plans require consistent employer contributions. Companies with predictable profits and stable cash flow are well-positioned to meet this requirement.

When executives and key employees need to save more

For business owners and high-earning employees maxing out 401(k) contributions, Cash balance plans allow for significantly higher savings, enabling them to accelerate retirement preparation.

When tax savings are a strategic goal

If your business is looking to lower its taxable income, the tax-deductible contributions of a Cash balance plan provide a strategic advantage.

When resources for plan oversight are available

Due to their complexity, Cash balance plans require professional oversight from administrators and investment advisors. Companies that allocate resources for this support can fully leverage the plan’s benefits.

How OpenPlan can help

Adopting and managing a Cash balance plan can be complex, but OpenPlan simplifies the process through expert guidance. As an investment fiduciary, OpenPlan seeks to ensure the portfolio is managed to meet guaranteed returns. Additionally, OpenPlan oversees vendor management, working with third-party administrators to ensure the plan operates smoothly.

OpenPlan provides:

• Proactive plan design consulting to align the plan with your company’s goals.
• Financial wellness benefits for employees and 1:1 access to licensed financial advisors for personalized retirement planning.

Cash balance plans aren’t suitable for every company. Still, for those with consistent cash flow, a desire to enhance employee benefits and executives needing higher contribution limits can be a game-changer. If your business aligns with these characteristics, a Cash balance plan could be the strategic advantage you’ve been looking for. Let OpenPlan help you navigate the complexities and maximize the benefits of this powerful retirement tool.

The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.