Cash Balance Plans and Small Business

Small business owners have been looking for ways to improve their tax situations, and increase savings, since the financial crisis. One thing that might help is what is known as the cash balance pension plan. The Wall Street Journal shares the advantages of this type of retirement plan :

Cash balance plans are a type of defined-benefit plan governed by the Employee Retirement Income Security Act. They can be effective for high earners, particularly professionals, because they allow far more pretax dollars to be socked away than a traditional 401(k) or Profit Sharing Plan…

In 2009, the maximum 401(k) contribution for someone under 50 is $16,500 and $49,000 for Profit Sharing Plan. In contrast, someone using a cash balance plan could “save larger sums in a relatively short period of time ,” says Jamie Ohl, senior vice president of The Hartford’s retirement plans group, which launched the Aviator Cash Balance Program on Tuesday.

The program, she says, is designed to complement a 401(k) plan and to enable a small business owner or professional to fund a plan that generates as much as $195,000 in annual retirement income.

Larger corporations have been using hybrid retirement benefit plans in large measure since 2006, when the legal issues surrounding them were defined. Cash balance plans are also attractive to professionals, like doctors, who can have their assets protected from lawsuits.

Of course, as with all retirement benefit plans, cash balance plans are not for everyone. Contributions are harder to change, so that if you use one you should have a very reliable income.

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