By Joseph P. Trybula, CFP®, AIF®, Printers 401K
For successful business owners and their employees, planning for retirement requires a strategic approach that maximizes tax efficiency and ensures substantial savings. Combining a Cash Balance Plan with a 401(k) Profit Sharing Plan offers a powerful way to achieve these goals – turning an ordinary retirement plan into an extraordinary plan, providing significant benefits that go beyond what standard retirement plans can offer.
Understanding the Basics
The 401(k) Profit Sharing Plan
A 401(k) Profit Sharing Plan is a retirement savings plan that allows employees to contribute a portion of their salary to a tax-deferred account. Employers can match these contributions and make additional profit-sharing contributions based on company performance. The contributions made to the plan are tax-deductible for the employer, and the earnings on the investments grow tax-deferred until withdrawal.
The Cash Balance Plan
A Cash Balance Plan is a type of defined benefit plan that acts like a hybrid between traditional pension plans and defined contribution plans, like the 401(k). In a Cash Balance Plan, each participant has an account that annually grows in two ways: first, through employer contributions (usually a percentage of salary or a flat dollar amount), and second, through an interest credit, which can be fixed or linked to an index. Unlike a 401(k), the investment risk is borne by the employer.
The Power of Combining Both Plans
Substantially Increase Contribution Limits
One of the most compelling reasons to combine a 401(k) Profit Sharing Plan with a Cash Balance Plan is the ability to significantly increase the total amount of contributions one can make.
For 2025, the employee contribution limit for a 401(k) plan is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and older, allowing for a potential total contribution of $31,000 for individuals in this age group.
Under the SECURE Act 2.0, a higher catch-up contribution applies to employees aged 60-63. For 2025, this special catch-up limit is $11,250 instead of $7,500, increasing the potential total contribution to $35,750 for individuals in this age range.
A Cash Balance Plan, however, allows for significantly higher contributions – especially for older participants – providing a powerful opportunity for tax-deferred savings.
For example, a 60-year-old business owner might be able to contribute over $300,000 annually to a Cash Balance Plan, depending on the business owner’s income and the design of the plan. Combined with the 401(k) Profit Sharing Plan, the total potential contributions can exceed $350,000 annually, creating substantial tax-deferred growth.
Enhanced Tax Deductions
Contributions made to both the 401(k) and the Cash Balance Plan are tax-deductible, which significantly can reduce a business owner’s taxable income. This particularly is advantageous for high-income earners who are looking to lower their tax liabilities while simultaneously boosting their retirement savings.
Flexibility in Plan Design
These plans offer considerable flexibility in how they are structured. For example, profit-sharing contributions in a 401(k) can be allocated in a way that rewards key employees, while a Cash Balance Plan can be designed to provide higher benefits to owners and older employees. This flexibility allows business owners to tailor the plans to meet both their retirement goals and their business objectives, effectively turning what might be an ordinary plan into an extraordinary plan.
Attract and Retain Talent
Offering a combination of a 401(k) Profit Sharing Plan and a Cash Balance Plan can make the company’s benefits package more attractive to top talent. Employees value the stability and potential growth these plans offer, making them a powerful tool for recruitment and retention.
Important Considerations
Plan Administration
Combining a Cash Balance Plan with a 401(k) Profit Sharing Plan adds complexity to the administration of retirement plans. These plans require careful management and compliance with IRS regulations. Working with experienced financial advisors and third-party administrators is crucial to ensure the plans are set up and maintained correctly.
Funding Requirements
Cash Balance Plans, as defined benefit plans, require mandatory annual contributions. This is different from the discretionary nature of profit-sharing contributions in a 401(k). Business owners need to ensure they have the cash flow to meet these funding requirements, especially during lean years.
Employee Communication
It’s important to clearly communicate the benefits and mechanics of these plans to employees. While they offer substantial benefits, the complexity sometimes can cause confusion. Providing educational resources and access to financial advisors can help employees make the most of these plans.
Conclusion
A combination of a Cash Balance Plan and a 401(k) Profit Sharing Plan represents one of the most powerful tools for building substantial retirement savings. By significantly increasing contribution limits, providing tax advantages and offering flexibility in plan design, these plans can help one achieve retirement goals while also benefiting the business. However, it’s essential to work with knowledgeable professionals to navigate the complexities and ensure the plans are tailored to everyone’s specific needs.
Whether a business is looking to maximize savings, reduce tax burdens or attract top talent, the strategic use of these plans can provide financial security and peace of mind for the future. By combining these strategies, anyone can transform an ordinary plan into an extraordinary plan, setting the stage for a prosperous retirement.
Joe Trybula, of Diversified Financial Advisors, is an Accredited Investment Fiduciary™ (AIF®) who manages the Printers 401(k) Plan in partnership with the Foil & Specialty Effects Association, making it available to eligible members. For more information on the Printers 401(k) Plan and strategies to maximize the benefits of a plan, email joe@diversifiedfa.com or call 800.307.0376.