Professional FirmCash Balance Plans

September 21, 2009

• It’s a defined benefit (DB) plan• subject to IRS maximum benefit limits • NOT subject to $49,000 defined contribution

(DC) maximum deduction• can be used with a maximum DC plan• contributions are not discretionary

What is a cash balance plan?

• It looks like a DC plan• has an account for each participant• account grows with pension and interest credits• money paid out is directly related to money paid in

What is a cash balance plan?

• Corporate plans: DC look and benefit pattern

• Different reasons for professional groups• Want to put away – and deduct - more than $49,000 DC limit• What you receive is directly tied to what you contribute –

important for multiple owners

• Pension credit formula can be tied to compensation, age, service, title, points, etc.

Corporate vs. Professional Plans

• Profit sharing formula• 7½% integrated plan, plus• extra for top partners to reach DC maximum

• Cash balance formula• Pension credit based on age and partnership percentage• Interest credit based on 10-year Treasuries

(3.53% for 2009)

Sample plans

Gross

pay

Recognized Pay

(net pay)

Profit Sharing

401(k) deferral

Cash Balance

Pension Credit

Total

Partner Age 55

$800,000 $245,000 $32,500 $22,000

(optional)

$122,500 $177,000

Partner Age 35

$150,000 $121,674 $13,077 $16,500

(optional)

$6,935 $36,513

Sample plans

• Plan must include 50 employees or 40% of all employees – with “meaningful” benefits

• Need to satisfy cross-testing “gateways”• Limits on the interest crediting rate• Investing to match interest credits• In most cases, participants may not direct the investment of

their accounts• Need to keep “funding target” 110% covered to pay lump

sums to top 25 HCE’s

Issues to consider

• January 2007 guidance for “statutory hybrid plans”, Notice 2007-6• Market rate of return: guidance expected in 2007• “Preservation of Capital” a tricky issue: §411(b)(5)• Temporary safe-harbor rates

• Long-term investment grade corporate bonds, 412(b)(5)• 3rd segment yield curve rate, §430(h)(2)• 30-year Treasury, §417(e)(3)• Notice 96-8 rates

• If plan meets vesting and interest credit rules, then:• No age discrimination problem (prospectively)• No “whipsaw”: lump sum equals account balance

Pension Protection Act (PPA) Changes

Questions?

Van Iwaarden Associates612-596-5961, 888-596-5960

cashbalance@vaniwaarden.comwww.vaniwaarden.com