Annuity Solutions for Business Owners

Cash Balance Plan

A Cash Balance Plan (CBP) in accordance with IRC § 412(e)(3) allows a business owner to deduct from current income a contribution amount (in addition to the 401(k) limit) that ranges from $100K for someone in their 40’s to as much as $250k for someone above age 60.  In contrast, a business owner using a 401(k), 403(b) or SEP-type plan can contribute only a maximum of $56,000 in 2019 ($62,000 above age 50)).

A Cash Balance Plan is typically invested in a fixed annuity, although whole life insurance can also be used (with less than 50% of plan assets), providing a known, stable rate of return with virtually no market risk.

For a sole proprietor, a solo CBP plan usually exists for a short time (e.g., less than 10 years). A sole owner or a partner can no longer make contributions into a CBP plan upon reaching the lifetime maximum amount (currently around $2.8M at age 62, inflation-adjusted annually). But in a group or multi-owner practice, this does not impact the other partners who can still make their own contributions independently. 

When a CBP is terminated, participant’s assets can be rolled over into an IRA or a 401k plan.  A participant in a group practice CBP rolls account money into an IRA or a 401k plan upon reaching the normal retirement age (typically 62), termination, or retirement.

Thus, a CBP provides a great opportunity for business owners to create a “fully insured” defined benefit plan with the largest possible deductions allowed by law. These plans are well suited for business owners and professionals who have few employees and a relatively short period of time until retirement.