For medical, dental, and law firms, navigating the complexities of retirement planning can feel like performing intricate surgery with a rusty scalpel.
While 401(k)s have long been the standard, a growing number of professional firms are discovering the strategic advantages of cash balance plans. These hybrid plans offer a powerful combination of defined benefit security and defined contribution flexibility, making them a compelling option for high-earning professionals.
What is a Cash Balance Plan?
Essentially, a cash balance plan is a defined benefit plan that’s designed to look and feel like a defined contribution plan. In other words, it’s a pension that is tracked individually like a 401(k) or profit sharing plan. Each participant has a hypothetical “account balance” that grows through annual “pay credits” (a percentage of their salary) and “interest credits” (a pre-determined interest rate). This structure provides transparency and predictability, making it easier for participants to understand their retirement savings.
Why Cash Balance Plans Make Sense for Professional Firms:
- Significant Tax-Deferred Savings for the Participants:
- Cash balance plans allow for substantially higher contribution limits compared to 401(k)s. This is particularly advantageous for partners and senior professionals in medical, dental, and law firms who are looking to maximize their retirement savings.
- Cash balance plans pair nicely with 401(k) or other defined contribution plans. The combination often provides much higher contributions-especially for senior staff–than 401(k)/profit sharing plans alone.
- The ability to contribute significantly more enables these professionals to catch up on retirement savings, especially if they started later in their careers.
- These higher contributions are tax-deductible for the firm, reducing current taxable income and deferring taxes until retirement.
- Significant Tax Deduction for the Firm
- The firm itself provides all the contributions for the participants. These contributions serve as a tax shelter for the firm itself. This is especially valuable for successful practices that pay a lot in taxes.
- Attracting and Retaining Top Talent:
- Offering a robust retirement plan like a cash balance plan can be a powerful tool for attracting and retaining highly skilled professionals.
- In competitive markets, the promise of a substantial retirement benefit can be a significant differentiator.
- Especially for older experienced professionals, the ability to build up large retirement savings in a shorter amount of time is a huge advantage.
- Flexibility and Customization:
- Cash balance plans can be designed to cater to the specific needs of a firm.
- The plan can be structured to provide higher benefits to older, more experienced partners, aligning with their contributions to the firm’s success.
- This flexibility allows firms to create a retirement plan that aligns with their unique demographics and financial goals.
- Business Owner Advantages:
- For the owners of professional firms, cash balance plans offer a strong ability to heavily weight their own retirement savings.
- This is especially true for older owners who want to rapidly increase their retirement savings before they retire.
- The ability to tailor the plan to benefit key employees, while still heavily favoring owners, makes it a powerful tool for business owners.
Considerations:
- Cash balance plans can be more complex to administer than 401(k)s, requiring actuarial calculations and annual reporting.
- These plans are subject to IRS regulations, and it’s essential to work with experienced professionals to ensure compliance.
- They are also less portable than a 401(k) when an employee leaves the firm, as the benefits are defined by the plan itself.
In Conclusion:
For medical, dental, and law firms seeking to maximize retirement savings, attract top talent, and create a secure financial future for their partners and employees, cash balance plans offer a compelling alternative to some more well-known retirement plans. By combining the benefits of defined benefit and defined contribution plans, cash balance plans provide a powerful tool for professional firms to achieve their retirement goals. It is very important that any professional firm considering a cash balance plan consults with a qualified financial advisor and actuary.
