What Is a Cash Balance/401(k) Combo Plan
For those business owners who are seeking to make annual plan contributions in excess of the 401(k) limitations, the cash balance/401(k) combo plan is an amazing option.
The ideal candidate for a combo cash balance/401(k) plan is a highly compensated business owner that is seeking larger contributions and greater tax deductions. The business should anticipate consistent profits and strong cash flow for a number of years for a couple of reasons. Firstly, because retirement plans are supposed to be permanent. Although there is not an objective standard of permanency, three-five five years appears to be sufficient time to satisfy the permanency requirement. Secondly, cash balance plan contributions are not discretionary but are determined by an actuary and are an annual obligation to the plan. In addition, when combining plans, the employer’s contribution to the 401(k) plan is no longer totally discretionary. There will normally be a minimum employer contribution amount required to the 401(k) plan to cover top heavy, minimum gateway, and non-discrimination testing requirements.
How the Cash Balance/401(k) Combo Plan Works
For 2020, the maximum annual employee contribution to a 401(k) plan is $19,500, or $26,000 if age fifty or over, with a maximum annual total plan contribution, including an employer contribution, of $57,000, or $63,500 if age fifty or over.
For those business owners who are seeking to make annual plan contributions in excess of the stated 401(k) limitations, sponsoring a cash balance plan in addition to a 401(k) plan is an amazing option. For example, for a fifty-year old business owner with annual compensation of $285,000 or more, combining a cash balance plan with a 401(k) plan increases the potential maximum annual tax deductible plan contribution from $63,500 up to $207,000.