Creating a Cash Balance Pension Plan for Your Law Firm
If a 401(k) plan married a defined benefit pension plan, they could give birth to a cash balance pension plan. This hybrid retirement account is gaining favor with baby boomer employees and law firm partners. But could it be right for your legal office?
People nearing retirement appreciate cash balance plans because the annual contribution limits are far higher than IRA or 401(k) plans, giving people light on retirement savings a quicker way to save for their golden years.
Like traditional defined benefit plans, employers put money in the fund. But unlike traditional pension plans, where payouts are structured as monthly payments that begin at retirement, cash balance plans make annual or lump-sum payments based on a hypothetical account composed of employer contributions and guaranteed interest credits hovering at around 5%.
Cash benefit plans are becoming increasingly popular with law firms and professionals who are approaching retirement with underfunded 401(k) and other retirement accounts. Here's why:
Cash balance plan annual contribution limits are higher than some other retirement account maximums. As of 2019, you can add $225,000 annually to a cash balance account in some cases. Also, unlike 401(k) plans, which require support staff and associates to contribute to the plan, cash balance plans don't require any participant contributions.
Cash balance plan investments are managed by employers or investment managers, but payouts are not directly affected by increases and decreases in the plan's value. In 401(k) accounts, participants pay the price for their investment decisions.
Cash balance plans typically are insured by the federal Pension Benefit Guaranty Corporation, which picks up some pension payments if the plan is terminated or can't pay promised benefits.
For 2022, an employee with 10 years of participation in a cash balance plan can receive a maximum annual IRS benefit payout of $245,000 per year beginning at the age of 62. The IRS places a limit on compensation used in the calculation of benefits. For 2022, the maximum (which is indexed to the CPI) was $305,000 and for 2021 it was $5,000 lower.
If you're looking for a good plan for your law firm, consider a cash balance plan. If you would like additional information about the benefits of cash balance plans, contact us today.