By Paul Marks

Special to The North Jefferson News



At many area professional firms, complaints have begun to arise regarding 401(k) limits and their inability to suit participants once retired.

High-earning professionals have begun to worry about whether $45,000 per year will provide the lifestyle to which they and their families have become accustomed.

As the 401(k) has become the fastest growing retirement plan in the United States, many firms have adopted plans that provide a deferral opportunity of between $15,500 and $20,500 for 2007.

In addition, many firms opt to add a profit-sharing plan, which allows the firm to contribute an additional $29,500. At this point, the 401(k)/profit-sharing plan is maxed out because the law only permits a total of $50,000 for participants age 50 and older and $45,000 for those under 50. However, by adding a cash balance plan, business owners could possibly contribute as much as $200,000 per year on top of their 401(k) and profit sharing accounts.

A cash balance plan is a type of qualified plan that specifies the amount of contribution to be credited to each participant and guarantees investment earnings on those contributions. Each participant has a hypothetical individual account and receives an annual statement from the plan’s actuary at the end of the plan year.

The principal advantage of the cash balance plan, when compared to traditional defined benefit plans, is that participants know what is going into the plan on their own behalf and what will come out upon leaving the firm.

The ideal candidates for a cash balance plan have the following characteristics:

• Professionals seeking a contribution of more than $45,000 to their retirement plan or making more than $250,000

• Highly profitable companies with a relatively consistent profit pattern

• Family and/or closely held businesses (succession planning)

• CPA firms, medical groups, law firms, architects, etc. Neglecting retirement savings while building a practice leaves little time to build savings.

• Older owners who need to catch up on their retirement savings

Because cash balance plans allow such large contributions, they require special attention and require special documentation. Actuarial services are required for these types of plans as the formulas involved require a level of consulting only previously found in traditional defined benefit plans.

For professionals who wish to increase their deferral of taxable income and increase contributions into a qualified retirement plan, the cash balance plan is a significant opportunity that must not be ignored.

Paul Marks is the managing consultant of the Birmingham office of The Actuarial Consulting Group, which has designed and administered qualified retirement plans since 1982. He can be reached at pmarks@acgworldwide.com.