Cash Balance

Cash Balance Plans: Ready to Rescue Attorneys’ Pension Plans

By William G. (Greg) Dorriety CFP and Dan Kravitz

If you are like many attorneys, you have probably seen your pension plan dwindle over the past couple of years. Your retirement funds that existed in 2007 have been reduced, perhaps substantially.  The outlook may be bleak for funding your retirement years with your current pension plan, especially since 401(k) plans allow a maximum contribution of only $22,000 for 2009, depending on your age.  If you add a profit-sharing plan, your maximum contribution allows only another $32,500, again depending on your age.  Combining the two for a maximum contribution of $54,500 is hardly enough to make up the losses you may have suffered in this recession.  This is especially true for those whose retirement is around the corner. 

However, there is a strategy that could quickly boost your pension funds for your retirement with tax deferred dollars.  The Cash Balance Plan is a hybrid plan – a cross between a defined contribution and a defined benefit plan with the best advantages of both.  Contributions can be as high as $220,000 per year, depending on the participant’s age.  When combined with a 401(k)/profit sharing plan, contributions can top nearly $275,000 per year on a pre-tax basis.

 Cash Balance Plans have been in existence since 1984 when BankAmerica Corporation implemented one of the first.  However, it wasn’t until 17 years later when a change in the tax law in 2001 allowed contributions to increase by 60%.  The Pension Protection Act of 2006 made Cash Balance Plans even more attractive.  The doors opened for a flood of plans whose participants wanted to make hefty contributions for their retirements.  According to John Hancock’s Larkspur database, the latest statistics indicate that there are over 100 Cash Balance Plans exist in Alabama, and there are more than 5,500 nationwide. 

 As a defined benefit plan, a Cash Balance Plan spells out the amount of contribution to be credited to each participant. The contribution can be made one of two ways: either a flat dollar amount or a percentage of pay.  Interest on the contributions is guaranteed and not dependent on asset performance.   

Each participant in a Cash Balance Plan has an individual account similar to accounts in a 401(k)/profit sharing plan.  All participant accounts are maintained by the plan actuary who generates annual participant statements.  Once participants terminate employment, they are eligible to receive the vested portion of their account balance, which is determined by the plan’s vesting schedule.  Law firms typically make certain that partner accounts are fully vested.

 The advantage of a Cash Balance Plan, relative to traditional defined benefit plans, is that the partners or shareholders know what is going into the plan on their behalf and what will come out when they leave.

 w firms that are good candidates for Cash Balance Plans exhibit one or more of the following characteristics:

·        Partners who want to contribute more than the allowable $54,500 a year with a 401(k)/profit sharing plan. With the value that plans have lost recently, partners may want to make up that amount as quickly as possible.  Another issue is that many attorneys neglect their personal retirement savings while building their practices; consequently, they need to catch up on retirement savings. Adding a Cash Balance Plan allows for acceleration of savings on a tax-favored basis.

·        Consistent profit patterns. Because a Cash Balance Plan is a pension with required contributions, consistent cash flow and profits are important.  In profit-sharing plans, contributions can vary from year to year depending on profitability.   However, Cash Balance Plans must be amended to permit various contribution levels. Employers can designate different contribution amounts for various participants, but there is a restriction on the frequency of amendments unless a valid economic reason exists.  For example, if a firm's profits are not expected to support its Cash Balance Plan contribution, then the plan can be amended. A Cash Balance Plan also can be frozen or terminated.

For partners who have watched their retirement funds erode over the past two years, and who recognize that 401(k)/profit-sharing plans are little help in boosting their pensions, a Cash Balance Plan provides a significant opportunity to increase contributions to a qualified retirement plan while deferring taxable income.

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William G. (Greg) Dorriety CFP® is President of the Optimum Retirement Advisors, Inc. located at 9805 Millwood Circlel, Suite A, Daphne, AL 36526.    He can be reached at (251) 625-8885 or at wdorriety@optimumgrp.com.  Visit the Optimum Retirement Advisors, Inc. website at www.optimumgrp.com. Securities offered through Royal Alliance Associates, Inc.  Member FINRA/SIPC.  Optimum Retirement Advisors, Inc. is not affiliated with Royal Alliance or registered as a broker-dealer or investment advisor.  Advisory services offered through Investment Advisors Asset Management, LLC, a registered investment advisor not affiliated with Royal Alliance Associates, Inc.

Daniel Kravitz is President of Kravitz, Inc., is a leader in Cash Balance Plan design. Kravitz has revised hundreds of retirement programs to include a Cash Balance Plan, resulting in larger contributions for executives.  He is a speaker on retirement plan design and administration, and serves on the board of the National Institute of Pension Administrators (NIPA). He can be reached at dkravitz@kravitzinc.com or (818) 379- 6162. Visit the Kravitz website at www.CashBalanceDesign.com.  Mr. Kravitz is not a Registered Representative or Invest Advisor Representative of Royal Alliance Associates Inc.

Past performance cannot guarantee future results. Please note that individual situations can vary.  Therefore, the information presented in this article should only be relied upon when coordinated with individual professional advice. Cash Balance Plans are more complex than traditional 401(k) plans and may not be suitable for everyone. However, for some business owners or professional partners, it may potentially decrease their tax burden and accelerate their savings within a tax-qualified plan.