Adding employees
Pairing a Cash Balance plan with a 401(k)
Most Cash Balance plans for businesses with employees sit alongside a 401(k) profit sharing plan. Together they give owners the largest deduction for the least staff cost.
How the pieces stack up for an owner
- 401(k) salary deferral
- $24,500
- Catch-up deferral, age 50+
- $8,000
- Profit sharing contribution, 6% of pay
- $21,600
- Cash Balance pay credit
- $275,000
- Total for the owner
- $329,100
The Cash Balance amount depends on age, pay, plan history, and staff. Owners age 60 to 63 can defer up to $11,250 in catch-up instead of $8,000.
What each plan does
| 401(k) profit sharing | Cash Balance | |
|---|---|---|
| Owner's role | Deferrals, catch-up, a profit sharing share | Most of the owner's savings |
| Staff's role | Profit sharing contribution, typically most of the 5% to 7.5% gateway | A small credit to satisfy 401(a)(26) |
| Investment risk | Each participant | The employer |
| Flexibility | Profit sharing is discretionary each year, with employee minimums needed to pass testing | A required minimum every year |
EXTREMELY IMPORTANT: The 6% deduction rule
When an employer sponsors both a defined benefit plan and a defined contribution plan, total deductions are subject to a combined limit. In practice, employer contributions to the 401(k) side are deductible up to 6% of eligible participants' pay without reducing the Cash Balance deduction. Salary deferrals don't count toward the 6%. Plans covered by the PBGC are exempt from the combined limit.
Safe harbor 401(k) plans
A safe harbor 401(k) avoids annual deferral testing and can satisfy the top-heavy minimum. Its contribution also counts toward the staff gateway, which often makes it a natural partner for a Cash Balance plan. Typically we recommend a 3% safe harbor to NHCEs only. This helps to satisfy testing while offering the most flexibility possible.