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Though any organization can set up its own Cash Balance plan, the complexities and regulatory requirements of these designs make it necessary to partner with a consultant to create an effective, low-risk program.
In this article, we provide a step-by-step guide for organizations and business owners that covers each step of setting up a customized Cash Balance Plan.
Before you make the first call to your consultants, start by understanding your retirement plan goals and collecting employee data:
Retirement Plan Goals: What would make a Cash Balance plan stand out as a solution? Do you hope to reward owners and key employees, meet hiring and retention goals, etc.?
Financial Stability: Like any Defined Benefit plan, Cash Balance plans are a long-term promise to your employees. They require consistent funding on behalf of the organization. Is this a feasible way forward for your organization?
Compile Employee Data: Gather initial data on your employees, including the number of employees at your organization, their ages, hire dates, compensation, and roles. This information will be used to inform retirement benefit calculations.
From here, you’re ready to locate and select a provider that fits your organization.
There are a variety of Cash Balance plan providers in the market. However, their level of expertise may vary. Many third-party administrators provide a wide range of services or operate as a standard 401(k) firm. These are often not the best fit to deal with the complexity of a Cash Balance plan. Once you’ve located a firm, here are a few initial questions you can ask to determine if they may be a good fit:
How many Cash Balance plans do you administer? An organization that specializes in Cash Balance plans should be able to provide a general range.
Can you describe your fee structure? Cash Balance plans generally cost more than other designs. Ensure fees are transparent and up-front.
At this point, your consultant will provide a feasibility study for your plan. This will show contributions, costs, expected savings, etc. You will also discuss plan design, including:
Classifying who is considered a participant. Will benefits extend to all staff or remain with owners and key executives?
Determining how your Cash Balance plan will be integrated with a 401(k) and/or profit-sharing plan. Most organizations include a 401(k)/profit-sharing plan benefit to help meet nondiscrimination requirements.
The credit formula. The majority of new Cash Balance plans are Market-Based as they offer reduced risk. It should also be noted that the way cash balance credits/contributions are determined can vary dramatically between different groups of participants and year to year. You should inquire how the credits are determined and how they might be expected to change year over year and evaluate this against your goals.
As noted in prior articles, the majority of new Cash Balance plans today are based on a variable-rate credit, also called a Market-Based Cash Balance plan. Market-Based Cash Balance plans offer reduced risk and expect favorable treatment from the latest FASB update.
At this stage, you will work with a financial advisor to establish an Investment Policy Statement. Your advisor should be familiar with Cash Balance plans, how they work, who bears the investment risk, and the expected lifetime of the plan, as each of these factors can influence the investment strategy. If you are a financial advisor and would like to learn more about Cash Balance plans, our Guide to Cash Balance plans for Financial Advisors can provides further information.
Your Cash Balance provider and financial advisor should work together to ensure investment decisions align with both the plan's design and the sponsor's broader financial objectives.
A knowledgeable provider can support the advisor by sharing plan-specific assumptions and funding considerations to help ensure recommendations are made with a complete view of the plan. This collaborative approach helps create a more holistic strategy and positions the plan for long-term success.
Before the plan can be adopted and participants onboarded, there are a few key deadlines and tasks to be aware of.
Thanks to SECURE 2.0, the timeframe a Cash Balance plan can be adopted is more flexible. See below for the key deadlines. Cash Balance plans can be established after the plan year and applied to the prior tax year. The deadline for plan adoption depends on your business entity:
S-Corps and Partnerships: March 15th, with an extended deadline of September 15th.
Sole Proprietorships: April 15th, with an extended deadline of September 15th.
C-Corps: April 15th, with an extended deadline of October 15th. The minimum funding deadline for a C-Corp is still September 15th, regardless of the tax extension.
Though adopting a plan after the calendar year is legal, running up too close to the above deadlines can create administrative and plan design problems as W-2 wages are already locked in and actuaries are rushed to complete calculations. Your Cash Balance provider should be consulted as early as possible.
Several documents must be signed before the plan can be established. These include:
Adoption Agreement/Plan Document: Must be signed before the tax deadline and before funding the plan trust.
Trust Agreement: Sometimes provided as part of the Adoption Agreement or provided as a standalone document, the Trust Agreement must be signed before opening the plan’s account.
Summary Plan Description: A document provided to participants that summarizes the Adoption Agreement. For new plans, it must be provided within 120 days of plan adoption or the effective date of the plan, whichever is later. For new employees, the Summary Plan Description must be provided within 90 days of eligibility.
Once the plan is established. Your last step will be to set up ongoing administration. For plan sponsors, core ongoing expectations include:
Year-end census data collection and processing
Nondiscrimination testing
Actuarial valuation and plan certification from a pension actuary
Annual Form 5500 filings and the attached Schedule SB forms
If you’re looking for a third-party administrator, consider reading our article, How to Choose a Pension Plan Administrator. Many third-party administrators have transitioned to administering other plan types, resulting in less investment in tools and expertise around Defined Benefit plans. This article outlines the features to look for in a provider that specializes in Cash Balance plans. Ideally, you will want to find an administrative partner with fully integrated actuarial services.
For additional support in getting started with a Cash Balance plan, feel free to schedule time with one of our consultants, who would be happy to answer your questions and help determine whether a Cash Balance plan could be a good fit for your organization.