Part 3: Setting Up and Maintaining a Cash Balance Plan
You’ve learned what a cash balance plan is and how it works. Now let’s talk about what it actually takes to set one up, what it costs, and how to keep it running smoothly year after year.
Spoiler: It’s not as complicated as it sounds — especially with the right team behind you.
Step 1: Assemble the Right Team
Setting up a cash balance plan requires a few key professionals:
- Third-Party Administrator (TPA) – Designs the plan, handles compliance testing, and manages annual filings.
- Actuary – Calculates annual contributions and funding requirements.
- Financial Advisor – Helps design the plan strategy and manages plan investments.
- CPA or Tax Advisor – Ensures your business tax planning and cash flow align with the contribution strategy.
Often, your advisor or TPA will quarterback this process and bring in the necessary specialists.
Step 2: Design the Plan
This is where your plan is customized around your goals. Key decisions include:
- How much you want to contribute annually
- How benefits will be allocated between owners and employees
- Whether to pair it with an existing 401(k)/profit-sharing plan
- What interest crediting rate you’ll use
Plans can be designed to maximize benefits for owners while meeting IRS fairness rules for employees. A well-crafted plan balances tax savings, retirement goals, and employee retention.
Step 3: Fund the Plan Annually
Cash balance plans are required to be funded each year based on the promised benefits. Your actuary calculates the minimum and maximum contribution range annually. Most business owners aim to fund at the maximum level for tax savings, but the contribution is flexible within that range.
Important: Unlike 401(k) plans, you can’t skip a year — so consistent business profitability is key.
Step 4: Stay Compliant
Each year, you’ll need to:
- Make contributions by your tax filing deadline (including extensions)
- File IRS Form 5500 and other plan documents
- Ensure your plan passes required nondiscrimination and coverage tests
Your TPA and actuary handle most of this, but it’s critical to stay in communication, especially if your business structure, compensation, or staffing changes.
Costs and Administration
Cash balance plans come with more administrative costs than a 401(k), but for most business owners, the tax savings far outweigh the fees.
Typical costs include:
- Initial plan design/setup: ~$2,000–$5,000
- Annual admin and actuarial services: ~$2,000–$5,000 per year
- Investment advisory and custodial fees (varies by provider)
Common Pitfalls to Avoid
- Inconsistent Cash Flow: These plans work best for stable, profitable businesses.
- Poor Plan Design: Cookie-cutter plans may cost more in employee benefits than necessary.
- Lack of Communication: Not informing your TPA or advisor about business changes can cause compliance issues.
- Assuming It’s Permanent: While cash balance plans are long-term tools, they can be frozen or terminated with the right planning — we’ll cover that in the next post.
Coming Up Next
In Part 4, we’ll dive into advanced strategies and frequently asked questions, like:
- What happens if you want to exit or sell your business?
- Can you freeze or terminate the plan?
- How do you coordinate with your other retirement accounts?
- What if your income drops?
Ready to explore whether a cash balance plan fits your business? [Let’s connect.]
