Tap into the tax and savings potential of cash balance plans



Cash balance plans (CBPs) are now often referred to as “modern retirement plans” as their use in tightly run businesses, including medical offices, has grown dramatically in recent years. CBPs are a solution for high income practice owners looking for tools that offer them significant short-term tax deductions along with strong long-term economics.

A CBP is a qualified retirement plan (QRP) that gives dermatologists the ability to increase tax deductions while increasing retirement benefits.

In a CBP, a participating employee has access to a certain amount upon reaching retirement age. Take $ 100,000 as an example. To reach $ 100,000 at retirement, the plan assumes a combination of employer contributions and compound interest overtime. When the employee retires, they can take the $ 100,000 either as a lump sum or as a pension that pays a portion of the $ 100,000 on a regular basis.

CBPs are like traditional defined benefit plans in terms of funding and reporting requirements. Minimum funding standards apply; There is a minimum annual employer contribution, which is reported on CBP’s 5500 tax form. An actuary must calculate this contribution amount using an appropriate actuarial funding method and actuarial assumptions as determined by the IRS. The employer may choose to pay an amount between the minimum funding requirement and the maximum allowable deduction, but should attempt to pay the actuary’s recommended contribution amount to meet the current benefit obligation of the plan.

On the other hand, CBPs differ from traditional defined benefit plans, which promise a specific monthly benefit amount at retirement (i.e. 3% of salary per year of service, payable at retirement age of 67). CBPs define benefits in terms of an account balance rather than a periodic amount. This can be helpful as employees always know what they are entitled to under the CBP as it is a specific amount. Owner and employee both know what goes into the plan for them and what comes out when they leave.

CBPs and 401 (k) s are not mutually exclusive. In fact, a dermatological practice can typically use both types of plans at the same time by “layering” a CBP over their existing 401 (k).

Main benefits of CBPs

There are 4 compelling reasons why dermatological practices are interested in CBPs:

1. Significantly increased Deductions for plan contributions
In 2021, 401 (k) s are subject to maximum deductible contribution limits of $ 19,500, with withholding plan limits of $ 58,000. (The catch-up fee for those over 50 is an additional $ 6,500 per year.) These limits increase slightly each year. Properly structured CBPs, on the other hand, can allow business owners to make tax-deductible contributions of $ 200,000 or more, saving them $ 80,000 to more than $ 100,000 in income taxes annually.

2. Additional costs are much lower than additional tax savings
CBPs typically include higher annual administrative costs and higher employer contribution amounts for employees than 401 (k) s and / or profit-sharing plans. Still, the tax savings tend to overshadow these additional expenses, which makes the CBP extremely attractive.

3. Possible second stage of tax deduction
For those whose income it is above the new tax codes Qualified Business Income Thresholds (QBI), a CBP can be a tool to reduce taxable income enough to qualify for the QBI deduction, creating 1 deduction leading to a second deduction.

CBPs are powerful planning tools that make greater contributions than the QRPs used in most medical offices today. CBPs can be attractive to practice owners looking for higher tax deductions, asset protection, and superior retirement planning.

4. Better access to the top (+5) asset protection level

As a tax-exempt asset under federal and most state laws, ERISA-qualified QRPs are protected at the highest (+5) level. Unless a CBP has been set up for just one owner with no other employees, this ERISA protection normally also applies to the CBP. Since higher contribution levels are allowed in the CBP, this means that more assets can be protected in the CBP than in most of the other QRPs.


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