December 18, 2020 • 14 mins
Karl Willman helps us better understand what a cash balance & a defined benefit plan are. Karl has over 10 years of experience administering and designing defined benefit plans, specializing in cash balance plans. He uses his experience to walk us thru the basics of these plans.
Stick around to the end to learn the basics of cash balance plans and how you can potentially benefit from a cash balance or a defined benefit plan.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Narrator (00:03):
Hello and welcome to the Arista Wealth Podcast where
we focus on your finances,wellness, and lifestyle so you
can focus on living your dreams.
We'll help you navigate throughimportant topics so that you can
elevate your life and financialhealth.
Let's get started with yourhost, Paul Moffat.
Paul Moffat (00:22):
Hello, welcome to Arista Advice Podcast.
We're thrilled and excited tohave you join us today.
As we approach the end of 2020,it's been a year of many ups and
downs, but one of the thingsthat is really important is
being able to manage your taxliability inside your businesses
and what also ends up on yourpersonal tax returns.
(00:46):
One of the strategies that hasreally become more mainstream
over the years is the benefit ofa cash balance plan.
We're thrilled and excited tohave Karl Willman join us today
from Nyhart.
He is a director ofrecord-keeping and actuarial
work over at Nyhart and he'sbeen doing this for 12 years.
(01:08):
Karl, welcome to the AristaAdvice Podcast.
Karl Willman (01:12):
Thanks Paul.
Thanks for having me.
It should be enjoyable.
Paul Moffat (01:15):
Karl, let's begin by first talking about the
basics of cash balance plans.
Many people don't realize thatthere's over$1.3 trillion in
cash balance plans.
Those balances have soared 15%in the last few years and plan
(01:36):
sponsor contributions are up30%.
Not only have they grown innumber of plans, but during the
same time, 401k plans have onlygrown 1%.
These are vehicles and taxstrategies that you add to an
existing 401k plan.
And so it does require somecomplexity it requires some
(01:58):
expertise.
And what's also wonderful toknow is that 92% of cash balance
plans are in place at firms withfewer than a hundred employees.
Then 50% of those plans have 10or fewer employees.
Obviously California, New Yorkhave the most plans because they
(02:19):
have the highest state incometax rates.
And when you couple that with afederal tax rate, people are
just running for tax deductionsand for safe harbors and
protection, also cash balanceplans.
They increase the diversity ofcompanies who are adopting them,
such as medical groups, dentalgroups, law firms still make up
(02:39):
about 48% of the cash balancemarket because of high wage
earners.
Also, what's really acceleratedthe growth of cash balance plans
is the pension protection act of2006.
That came out and there was alot of clarity that was
provided.
As of 2017 numbers that we havethere's over 23,520 cash balance
(03:06):
plans throughout the nation.
What's the attraction to them,?
Rising taxes, also legislativechanges, then there's also
retirement savings crisis, andthat you can add them to an
existing 401k plan.
And so we're excited to talkabout them today.
Karl, give us a couple ofinsights on what you're seeing
(03:28):
out there in the trenches withthese cash balance plans.
Karl Willman (03:32):
Yeah.
Thanks Paul.
That's all right on the money.
These plans are attractive tohigh-income professionals most
of the time, because they aremaking a lot of money and need
to save on their taxes.
That's usually the first draw isto way to get some additional
tax deferred money intoqualified retirement plans.
It is above and beyond what youwould normally do in a 401k
(03:53):
that's kind of the basis of it.
And a cash balance plan is stilla defined benefit plan with all
the risks, you know, pros andcons of a traditional defined
benefit plan, but it's a lotmore popular than traditional
defined benefit plans now for anumber of reasons.
And that's, you know, there,there are a lot less riskier
than not a lot less volatilebecause of interest rate changes
with the IRS.
And it's a lot easier tounderstand, you know, it's
(04:14):
commonly referred to as a hybridplan because it looks and feels
more like your 401k, whereeverything is based on an
account balance.
Yeah, these are really taken offrecently.
The law changes the pensionprotection act of 2006, gave us
some clarity there was someregulation in 2010 and 2014.
And not that these were riskythings to do before that, but
(04:35):
they just added some additionalclarity.
The IRS gave us some additionalguidance of how these are
supposed to work.
And since there, and these havereally exploded in the last five
to 10 years.
Paul Moffat (04:44):
Yeah, walk us through Karl the difference
between this cash balance and adefined benefit and what the
difference is and why one woulddo a cash balance versus a
defined benefit.
Karl Willman (04:57):
Yes, for most of these small employers, like
we're talking about where 90% ofthe plans are under a hundred, a
hundred lives, the main focus isusually the tax deduction for
the business owners.
So that's what we're doing here.
This is above and beyond the401k and think of a traditional
defined benefit plan as a plan.
(05:18):
You know, you're going to workfor some company for a number of
years and draw an annuity at age65 of say, a thousand dollars a
month or something like that.
And so it is all still employermoney and the employer has to
put enough money every year tomake sure that money is there to
pay those benefits as they comedue.
But, a cash balance plan is justa lot easier for me to
conceptualize.
It's harder for somebody to knowwhat a annuity is worth at
(05:40):
retirement age.
They may be 10, 20, 30 yearsaway, but they know what an
account balance is, right?
I know what$10,000 in an accountis to me today.
That's just easier tounderstand.
And the other big drawback is,is the volatility and the
funding of the plan of atraditional defined benefit plan
and the value of those benefitschange constantly with the IRS
(06:01):
interest rate market.
So you might have that monthlyannuity payment, but what that's
truly worth today is alwaysdifferent where a cash balance
plan is kind of the opposite.
You know exactly what youraccount balance is, how much
that's going to earn over time,based on some interest crediting
rate.
It's not as volatile there forthose standpoints.
Paul Moffat (06:20):
That's great.
Thanks for adding that Karl.
Who funds them and what happensif a business does well and then
they run into business cyclechanges, and how is a cash
balance plan terminated or shutoff?
Speaker 3 (06:36):
Yeah, this is all employer money.
So employees are not deferringlike they would have the 401k.
So all from the company.
The goal typically is thelifetime maximum you could get
out of any cash balance ordefined benefit plan right now
is about$2.9 million.
That's usually where we'reaiming to see what can you put
in today to get to that lifetimemaximum.
(06:57):
And there's some caveats to thatyou have to have a plan for at
least 10 years to get there, youhave to be at least age 62 to
get to that number.
But you certainly don't have todesign a plan at that level.
That's just the potential,that's what it could grow to.
So certainly if you get to that$2.9 million number, you get rid
of the plan and terminated, oras you mentioned, if there's
legitimate business reasons, youcan terminate the plan sooner.
(07:20):
What the IRS doesn't wantsomebody, for example, a law
firm, that's going to have alarge settlement for one year to
avoid taxes and then not fundedagain in the future.
They want you to set it up forthe foreseeable future you're
going to fund it for severalyears in a row.
But yeah, if you sell yourbusiness or if there's
legitimate change in businesslike 2020 with COVID crisis, you
(07:41):
know, certainly everybody'srevenues are factually different
from prior years, good or bad,both directions, you know,
health issues.
And certainly if there'slegitimate business reasons, you
can always terminate your plansooner than that 10 year time
horizon, or where you get tothat maximum level.
And once that plan isterminated, everybody can take
their money and just like a401k, it's still tax deferred.
(08:02):
You can roll it into an IRA, orroll it into a 401k, or that
time you take it as income andpay taxes on it.
Paul Moffat (08:09):
Yeah.
So they just roll over to theIRA and then they just pull that
money out of the IRA andretirement, hopefully the lower
tax rate.
Karl Willman (08:17):
That's the goal.
Paul Moffat (08:18):
Thats great.
Karl, as we've look at the bigpicture of cash balance plans,
who are the top 10 plans in thecountry, and what are some of
the companies that also are sortof leading the way with these
cash balance plans?
Karl Willman (08:32):
Yeah, well, some of the big names you'll
recognize IBM, ATT, Boeing,FedEx, bank of America.
Some companies like that havecash balance plans that are
quite large and have been aroundfor a long time that have 20 to
50 billion o f assets each ofthose plans.
Most of the small employers theyobviously t hey don't have quite
that much.
Some of them are quite a bitsmaller money b ecause if it's,
(08:53):
especially, if it's a singleowner, you're not going to get
more than that$2.9 million inthe plan.
But for the most part, medicaland dental offices are biggest
users and law firms are prettypotential as well.
A nd nothing magical about thoselines of businesses, other than
they have strong, consistenthigh c ash f low.
That's what we're looking for as you know, anybody that has
consistently high cashflow thatneeds to save on their taxes,
(09:15):
but we've seen lots of differentthings from HVAC companies and
mobile home parks, gun shops,anybody that is potentially a
candidate for this plan, as longas they have strong income.
Paul Moffat (09:27):
Yeah.
We're seeing the same thing, abroader diversification of
businesses.
Whether it's a public storagebuilder, whether it's, um, pool
builders, construction companiesthat have consistent cashflow.
So yeah, we're, we're seeingthat diversification also there
and then help us understand Karlinside these cash balance plans,
(09:48):
the interest credit rates andhow that money needs to be
invested inside.
Karl Willman (09:54):
Yeah.
So there's a number of optionsthere, but this is kind of
conceptually what makes the cashbalance different than your
401k.
That the plan document is goingto specify and interest
crediting rate.
So everybody is guaranteed acertain rate of return over
their lifetime of the plan.
Most of the plans have a fixedrate of return, something like a
fixed three or four or 5%return.
(10:16):
So if you're an employee of thiscompany, you know, you're going
to get this contribution credit,and it's going to grow at four
or 5% every year.
You know exactly what yourbenefit can be at retirement
age.
So that's all an employer'sobligation to make the
investments kind of line up withthat.
That's the point that you wantto keep the assets in the plan
close to the benefits that areearned.
(10:37):
Now, there are some otheroptions besides the fixed rate,
some of them are tied todifferent indexes that you can
have a little bit of a floatingrate, but it's usually got some
kind of floor cap on it.
It's still within that narrowrange.
So yeah.
So say 5% is your fixed rate ofreturn in a plan that's kind of
your bogey in your investments.
This is trying to hit thatnumber as a defined benefit
plan.
(10:57):
There are minimum required andmaximum deductible amounts that
can go into the plan every year.
If you go out and get like a 20%return on your, on your plan,
like you might be trying tomaximize your return in a 401k
plan, you know, it's, it's agood problem to have you had too
much money in the plan, but itmight mean you can't put in as
much because you've overshotyour goal.
And if the tax deferral is themain objective, then that's bad
(11:20):
news, right?
You're not saving as much asyour taxes that way.
And on the flip side, if youtake that risk and you
underperform or lose money,there are some rules in place
that you have to make some ofthat up over time.
So you have to put in more moneyinto the plan.
That's the goal then it'susually hit whatever your
interest crediting rate is kindof the hurdle for your cash
balance assets.
And that's usually a smallnumber, right?
(11:40):
So you've got to think of thiskind of as the conservative
piece of your overall portfolio.
So go out and take more risk ifyou want in the 401k or in your
IRA, and just think of this asthe low risk part of your, your
assets.
Paul Moffat (11:53):
No, that's great Karl and there is that
importance of helping them setthe expectation with these cash
balance plans.
Also, making sure that if itgrows too fast, the next year,
you're not going to be able tocontribute so much, you're going
to have to pay more to uncleSam.
So that's great.
Karl Willman (12:12):
And you know, extreme example is if you go out
in the invest, you put in maybea hundred thousand dollars in
the plan and you go out andinvest something that turns out
to be, you know, a Google IPOand you get your three,$2.9
million and you're done, right.
You're stuck.
You can't put anything inanywhere else into that plan
over its lifetime.
Paul Moffat (12:27):
That's right.
Karl helped us just understandwith the cash balance plan in
closing here, the formula tobenefit who and what highly
compensated, not highlycompensated and what some of the
ranges are that we want tobenefit the owners and where it
makes sense in closing.
Karl Willman (12:46):
Yeah.
So the, the limits in a cashbalance plan and you can see the
, you know, to get to that$2.9million are pretty large.
So a business owner that's intheir mid to late fifties, they
can put away 200 to$250,000potentially into a cash balance
plan.
It's easily above and beyondwhat they can do on their 401k
already.
It's usually paired with the401k for testing, just like all
(13:07):
the same testing rules they'realready used to in a 401k where
we have to make sure that thebenefits are non-discriminatory
for the owners versus thenon-owners.
So there are some rules that,you know, you'll have to give
benefits to at least a certainportion of your staff and
everybody that's, you know, anemployee in those plans will get
substantial profit sharingallocations to make the combined
plans work out.
That's typically the goal thatobviously it is an employee
(13:29):
benefit plan as well, right?
You are giving additionalretirement dollars.
That's all employer funded thatit can serve as a, as a tool to
attract and retain employees aswell, just like your 401k plan.
But typically we think of thecash balance kind of as the
owner's plan, where the 401k ismore of the employee benefit
plan.
That's where they get more oftheir staff will get more of
(13:49):
their benefits there.
Paul Moffat (13:50):
Excellent.
Karl, it's always good to visitwith you, and we really
appreciate all that you've donethe work that you've done, many
of our clients and the otherprofessionals you work with,
don't know the man behind thescreens and behind the curtains.
Karl Willman (14:05):
There's usually a reason for that.
Paul Moffat (14:08):
And as we joke, we say, yeah, we have a guy who, u
h, has a couple o f pocketprotectors and some tape on his
glasses.
This is the guy who's got thosepocket protectors.
So please be safe out there,have a wonderful, a happy
holidays and a Merry Christmas.
Appreciate your help.
Thank you.
Narrator (14:29):
This episode of the Arista wealth podcast has ended,
but be sure to subscribe formore advice on your finances,
wellness, and lifestyle.
So you can focus on living yourdreams.
Don't forget to rate and reviewso we can continue to bring you
the best content.
See you on the next episode.
Hello and welcome to the Arista Wealth Podcast where
we focus on your finances,wellness, and lifestyle so you
can focus on living your dreams.
We'll help you navigate throughimportant topics so that you can
elevate your life and financialhealth.
Let's get started with yourhost, Paul Moffat.
Paul Moffat (00:22):
Hello, welcome to Arista Advice Podcast.
We're thrilled and excited tohave you join us today.
As we approach the end of 2020,it's been a year of many ups and
downs, but one of the thingsthat is really important is
being able to manage your taxliability inside your businesses
and what also ends up on yourpersonal tax returns.
(00:46):
One of the strategies that hasreally become more mainstream
over the years is the benefit ofa cash balance plan.
We're thrilled and excited tohave Karl Willman join us today
from Nyhart.
He is a director ofrecord-keeping and actuarial
work over at Nyhart and he'sbeen doing this for 12 years.
(01:08):
Karl, welcome to the AristaAdvice Podcast.
Karl Willman (01:12):
Thanks Paul.
Thanks for having me.
It should be enjoyable.
Paul Moffat (01:15):
Karl, let's begin by first talking about the
basics of cash balance plans.
Many people don't realize thatthere's over$1.3 trillion in
cash balance plans.
Those balances have soared 15%in the last few years and plan
(01:36):
sponsor contributions are up30%.
Not only have they grown innumber of plans, but during the
same time, 401k plans have onlygrown 1%.
These are vehicles and taxstrategies that you add to an
existing 401k plan.
And so it does require somecomplexity it requires some
(01:58):
expertise.
And what's also wonderful toknow is that 92% of cash balance
plans are in place at firms withfewer than a hundred employees.
Then 50% of those plans have 10or fewer employees.
Obviously California, New Yorkhave the most plans because they
(02:19):
have the highest state incometax rates.
And when you couple that with afederal tax rate, people are
just running for tax deductionsand for safe harbors and
protection, also cash balanceplans.
They increase the diversity ofcompanies who are adopting them,
such as medical groups, dentalgroups, law firms still make up
(02:39):
about 48% of the cash balancemarket because of high wage
earners.
Also, what's really acceleratedthe growth of cash balance plans
is the pension protection act of2006.
That came out and there was alot of clarity that was
provided.
As of 2017 numbers that we havethere's over 23,520 cash balance
(03:06):
plans throughout the nation.
What's the attraction to them,?
Rising taxes, also legislativechanges, then there's also
retirement savings crisis, andthat you can add them to an
existing 401k plan.
And so we're excited to talkabout them today.
Karl, give us a couple ofinsights on what you're seeing
(03:28):
out there in the trenches withthese cash balance plans.
Karl Willman (03:32):
Yeah.
Thanks Paul.
That's all right on the money.
These plans are attractive tohigh-income professionals most
of the time, because they aremaking a lot of money and need
to save on their taxes.
That's usually the first draw isto way to get some additional
tax deferred money intoqualified retirement plans.
It is above and beyond what youwould normally do in a 401k
(03:53):
that's kind of the basis of it.
And a cash balance plan is stilla defined benefit plan with all
the risks, you know, pros andcons of a traditional defined
benefit plan, but it's a lotmore popular than traditional
defined benefit plans now for anumber of reasons.
And that's, you know, there,there are a lot less riskier
than not a lot less volatilebecause of interest rate changes
with the IRS.
And it's a lot easier tounderstand, you know, it's
(04:14):
commonly referred to as a hybridplan because it looks and feels
more like your 401k, whereeverything is based on an
account balance.
Yeah, these are really taken offrecently.
The law changes the pensionprotection act of 2006, gave us
some clarity there was someregulation in 2010 and 2014.
And not that these were riskythings to do before that, but
(04:35):
they just added some additionalclarity.
The IRS gave us some additionalguidance of how these are
supposed to work.
And since there, and these havereally exploded in the last five
to 10 years.
Paul Moffat (04:44):
Yeah, walk us through Karl the difference
between this cash balance and adefined benefit and what the
difference is and why one woulddo a cash balance versus a
defined benefit.
Karl Willman (04:57):
Yes, for most of these small employers, like
we're talking about where 90% ofthe plans are under a hundred, a
hundred lives, the main focus isusually the tax deduction for
the business owners.
So that's what we're doing here.
This is above and beyond the401k and think of a traditional
defined benefit plan as a plan.
(05:18):
You know, you're going to workfor some company for a number of
years and draw an annuity at age65 of say, a thousand dollars a
month or something like that.
And so it is all still employermoney and the employer has to
put enough money every year tomake sure that money is there to
pay those benefits as they comedue.
But, a cash balance plan is justa lot easier for me to
conceptualize.
It's harder for somebody to knowwhat a annuity is worth at
(05:40):
retirement age.
They may be 10, 20, 30 yearsaway, but they know what an
account balance is, right?
I know what$10,000 in an accountis to me today.
That's just easier tounderstand.
And the other big drawback is,is the volatility and the
funding of the plan of atraditional defined benefit plan
and the value of those benefitschange constantly with the IRS
(06:01):
interest rate market.
So you might have that monthlyannuity payment, but what that's
truly worth today is alwaysdifferent where a cash balance
plan is kind of the opposite.
You know exactly what youraccount balance is, how much
that's going to earn over time,based on some interest crediting
rate.
It's not as volatile there forthose standpoints.
Paul Moffat (06:20):
That's great.
Thanks for adding that Karl.
Who funds them and what happensif a business does well and then
they run into business cyclechanges, and how is a cash
balance plan terminated or shutoff?
Speaker 3 (06:36):
Yeah, this is all employer money.
So employees are not deferringlike they would have the 401k.
So all from the company.
The goal typically is thelifetime maximum you could get
out of any cash balance ordefined benefit plan right now
is about$2.9 million.
That's usually where we'reaiming to see what can you put
in today to get to that lifetimemaximum.
(06:57):
And there's some caveats to thatyou have to have a plan for at
least 10 years to get there, youhave to be at least age 62 to
get to that number.
But you certainly don't have todesign a plan at that level.
That's just the potential,that's what it could grow to.
So certainly if you get to that$2.9 million number, you get rid
of the plan and terminated, oras you mentioned, if there's
legitimate business reasons, youcan terminate the plan sooner.
(07:20):
What the IRS doesn't wantsomebody, for example, a law
firm, that's going to have alarge settlement for one year to
avoid taxes and then not fundedagain in the future.
They want you to set it up forthe foreseeable future you're
going to fund it for severalyears in a row.
But yeah, if you sell yourbusiness or if there's
legitimate change in businesslike 2020 with COVID crisis, you
(07:41):
know, certainly everybody'srevenues are factually different
from prior years, good or bad,both directions, you know,
health issues.
And certainly if there'slegitimate business reasons, you
can always terminate your plansooner than that 10 year time
horizon, or where you get tothat maximum level.
And once that plan isterminated, everybody can take
their money and just like a401k, it's still tax deferred.
(08:02):
You can roll it into an IRA, orroll it into a 401k, or that
time you take it as income andpay taxes on it.
Paul Moffat (08:09):
Yeah.
So they just roll over to theIRA and then they just pull that
money out of the IRA andretirement, hopefully the lower
tax rate.
Karl Willman (08:17):
That's the goal.
Paul Moffat (08:18):
Thats great.
Karl, as we've look at the bigpicture of cash balance plans,
who are the top 10 plans in thecountry, and what are some of
the companies that also are sortof leading the way with these
cash balance plans?
Karl Willman (08:32):
Yeah, well, some of the big names you'll
recognize IBM, ATT, Boeing,FedEx, bank of America.
Some companies like that havecash balance plans that are
quite large and have been aroundfor a long time that have 20 to
50 billion o f assets each ofthose plans.
Most of the small employers theyobviously t hey don't have quite
that much.
Some of them are quite a bitsmaller money b ecause if it's,
(08:53):
especially, if it's a singleowner, you're not going to get
more than that$2.9 million inthe plan.
But for the most part, medicaland dental offices are biggest
users and law firms are prettypotential as well.
A nd nothing magical about thoselines of businesses, other than
they have strong, consistenthigh c ash f low.
That's what we're looking for as you know, anybody that has
consistently high cashflow thatneeds to save on their taxes,
(09:15):
but we've seen lots of differentthings from HVAC companies and
mobile home parks, gun shops,anybody that is potentially a
candidate for this plan, as longas they have strong income.
Paul Moffat (09:27):
Yeah.
We're seeing the same thing, abroader diversification of
businesses.
Whether it's a public storagebuilder, whether it's, um, pool
builders, construction companiesthat have consistent cashflow.
So yeah, we're, we're seeingthat diversification also there
and then help us understand Karlinside these cash balance plans,
(09:48):
the interest credit rates andhow that money needs to be
invested inside.
Karl Willman (09:54):
Yeah.
So there's a number of optionsthere, but this is kind of
conceptually what makes the cashbalance different than your
401k.
That the plan document is goingto specify and interest
crediting rate.
So everybody is guaranteed acertain rate of return over
their lifetime of the plan.
Most of the plans have a fixedrate of return, something like a
fixed three or four or 5%return.
(10:16):
So if you're an employee of thiscompany, you know, you're going
to get this contribution credit,and it's going to grow at four
or 5% every year.
You know exactly what yourbenefit can be at retirement
age.
So that's all an employer'sobligation to make the
investments kind of line up withthat.
That's the point that you wantto keep the assets in the plan
close to the benefits that areearned.
(10:37):
Now, there are some otheroptions besides the fixed rate,
some of them are tied todifferent indexes that you can
have a little bit of a floatingrate, but it's usually got some
kind of floor cap on it.
It's still within that narrowrange.
So yeah.
So say 5% is your fixed rate ofreturn in a plan that's kind of
your bogey in your investments.
This is trying to hit thatnumber as a defined benefit
plan.
(10:57):
There are minimum required andmaximum deductible amounts that
can go into the plan every year.
If you go out and get like a 20%return on your, on your plan,
like you might be trying tomaximize your return in a 401k
plan, you know, it's, it's agood problem to have you had too
much money in the plan, but itmight mean you can't put in as
much because you've overshotyour goal.
And if the tax deferral is themain objective, then that's bad
(11:20):
news, right?
You're not saving as much asyour taxes that way.
And on the flip side, if youtake that risk and you
underperform or lose money,there are some rules in place
that you have to make some ofthat up over time.
So you have to put in more moneyinto the plan.
That's the goal then it'susually hit whatever your
interest crediting rate is kindof the hurdle for your cash
balance assets.
And that's usually a smallnumber, right?
(11:40):
So you've got to think of thiskind of as the conservative
piece of your overall portfolio.
So go out and take more risk ifyou want in the 401k or in your
IRA, and just think of this asthe low risk part of your, your
assets.
Paul Moffat (11:53):
No, that's great Karl and there is that
importance of helping them setthe expectation with these cash
balance plans.
Also, making sure that if itgrows too fast, the next year,
you're not going to be able tocontribute so much, you're going
to have to pay more to uncleSam.
So that's great.
Karl Willman (12:12):
And you know, extreme example is if you go out
in the invest, you put in maybea hundred thousand dollars in
the plan and you go out andinvest something that turns out
to be, you know, a Google IPOand you get your three,$2.9
million and you're done, right.
You're stuck.
You can't put anything inanywhere else into that plan
over its lifetime.
Paul Moffat (12:27):
That's right.
Karl helped us just understandwith the cash balance plan in
closing here, the formula tobenefit who and what highly
compensated, not highlycompensated and what some of the
ranges are that we want tobenefit the owners and where it
makes sense in closing.
Karl Willman (12:46):
Yeah.
So the, the limits in a cashbalance plan and you can see the
, you know, to get to that$2.9million are pretty large.
So a business owner that's intheir mid to late fifties, they
can put away 200 to$250,000potentially into a cash balance
plan.
It's easily above and beyondwhat they can do on their 401k
already.
It's usually paired with the401k for testing, just like all
(13:07):
the same testing rules they'realready used to in a 401k where
we have to make sure that thebenefits are non-discriminatory
for the owners versus thenon-owners.
So there are some rules that,you know, you'll have to give
benefits to at least a certainportion of your staff and
everybody that's, you know, anemployee in those plans will get
substantial profit sharingallocations to make the combined
plans work out.
That's typically the goal thatobviously it is an employee
(13:29):
benefit plan as well, right?
You are giving additionalretirement dollars.
That's all employer funded thatit can serve as a, as a tool to
attract and retain employees aswell, just like your 401k plan.
But typically we think of thecash balance kind of as the
owner's plan, where the 401k ismore of the employee benefit
plan.
That's where they get more oftheir staff will get more of
(13:49):
their benefits there.
Paul Moffat (13:50):
Excellent.
Karl, it's always good to visitwith you, and we really
appreciate all that you've donethe work that you've done, many
of our clients and the otherprofessionals you work with,
don't know the man behind thescreens and behind the curtains.
Karl Willman (14:05):
There's usually a reason for that.
Paul Moffat (14:08):
And as we joke, we say, yeah, we have a guy who, u
h, has a couple o f pocketprotectors and some tape on his
glasses.
This is the guy who's got thosepocket protectors.
So please be safe out there,have a wonderful, a happy
holidays and a Merry Christmas.
Appreciate your help.
Thank you.
Narrator (14:29):
This episode of the Arista wealth podcast has ended,
but be sure to subscribe formore advice on your finances,
wellness, and lifestyle.
So you can focus on living yourdreams.
Don't forget to rate and reviewso we can continue to bring you
the best content.
See you on the next episode.
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