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Cash Balance Plans: What’s Your Advantage?

Need to boost your retirement savings? A cash balance plan — generally along with a 401(k) plan — might allow you to compensate for years of underfunding your retirement.

Blending features of a traditional pension plan with the look and feel of a 401(k)/profit-sharing plan, these hybrid plans require company contributions based on a percentage of pay or a flat dollar amount. An annual interest credit set in the plan documents is credited to each participant’s balance. You must ensure contributions to your plan are invested to pursue the plan’s rate goal. When a participant terminates employment, vested account balances can be withdrawn, which may trigger taxes, or rolled over to an IRA or other employer retirement plan.

POSITIVES

For owners and higher paid employees, the biggest attraction of cash balance plans is that they allow tax-deferred contributions much higher than the limits placed on 401(k) and other defined contribution plans. You and your employees can contribute to both plans, and you do not need to include all employees in the cash balance plan. Another attractive feature is that your company may claim an above-the-line tax deduction for contributions.

For those nearing retirement, cash balance plans, unlike traditional pension plans, have accelerated vesting requirements. Participants must be 100% vested in their benefits no later than after completing three years of vesting service. No graded vesting schedule is allowed. The Pension Benefit Guaranty Corp (PBGC) protects most benefits under a cash balance plan.

NEGATIVES

These plans are subject to IRS minimum funding requirements, which may require cash funding in years your company would rather not contribute at all or as much as necessary. With an exception for small benefits, a cash balance plan must offer forms of payment other than lump sums (e.g., Qualified Joint and Survivor). Generally, the plan sponsor has to pay PBGC premiums. Because they’re subject to many of the pension plan requirements, cash balance plans are more complicated than a 401(k). Consult your financial professional.

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Clean Out Your Subscriptions

You may be so used to seeing recurring charges on your monthly statements that they don’t register as the unnecessary expenses they may be. Do you use those services enough to warrant paying for them? Eliminating those fees can result in sizable savings over time.

GET STARTED

Look at your credit card and bank statements and what you’re spending on things you no longer use. Question anything you don’t recognize. If you don’t see how to unsubscribe on the company’s site, search the web, call customer service, or check with your credit card company’s customer service.

GOING FORWARD

Turn off the auto-renewal option when you subscribe. If you opt out, the company has to contact you before charging your credit card. Read the fine print on special offers. For example, opt out before a lower promotional fee ends.

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Independent Contractor Rules Updated

Whether you use independent contractors in your business or are an independent contractor yourself, take note of recent Department of Labor (DOL) changes in the Fair Labor Standard Act’s (FLSA) rule for determining independent contractor status — and the consequences of misclassification.

MULTIFACTOR ANALYSIS RESTORED

The new independent contractor rule restores the multifactor analysis used by courts for decades to determine whether a worker is an employee or an independent contractor. Under the update, six factors guide the analysis of a worker’s relationship with an employer:

  • Any opportunity for profit or loss a worker might have
  • The financial stake of any resources a worker has invested in the job
  • The degree of permanence of the work relationship
  • The degree of control an employer has over the person’s work, whether what the person does is essential to the employer’s business
  • A worker’s skill and initiative

These factors aren’t all-inclusive, and different factors might be more or less important in different cases depending on the facts of that case. Employers and individuals who consider themselves independent contractors should carefully review independent contractor and employee classifications in light of the DOL’s new rule. The DOL has a series of FAQs on its website that may answer some of your questions.

MISCLASSIFICATION

Misclassification may result in lost wages, benefits, unemployment insurance, and workers’ compensation coverage for affected workers. Whether an employer misclassifies any workers unintentionally or willfully, doing so can result in significant liabilities, including back overtime pay for up to three years and payment of attorney fees for misclassified workers.

That’s not all. Employers face additional penalties under the FLSA and other applicable employment and employee-benefit laws, including:

  • Loss of tax-qualified status for the employer’s retirement plan
  • Back FICA withholding funds for affected workers
  • Criminal and civil penalties

Talk to your trusted legal professional about the classification rule changes.

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June 2024 Client Line

Independent Contractor Rules Updated – take note of recent Department of Labor changes in the Fair Labor Standard Act’s rule for determining independent contractor status.

Clean Out Your Subscriptions – do you have recurring charges that don’t register as unnecessary?

Cash Balance Plans: What’s Your Advantage? – a cash balance plan might allow you to compensate for years of underfunding your retirement.

June 2024 Client Profile

Start Your College Grad on the Path to Becoming a Millionaire – you may be able to do this utilizing any unused funds in the student’s 529 plan.

June 2024 Question and Answer

Legal Powers: Prepare Your Child for College – along with other things necessary for a move to college, your student should have medical and personal powers of attorney.

Do You Feel Wealthy? – making it into the millionaires’ club isn’t what it used to be.

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May 2024 Short Bits

72% of female gray retirees didn’t view their engagement ring as a financial asset nor realize selling it could give them cash to invest and supplement their retirement savings.

*Building a Financial Fresh Start, Worthy.com

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Cutting the Financial Cord

In a 2023 Credit Karma survey, nearly a third of parents with children over 18 reported currently providing them with financial support. 64% of those parents said they provide support by allowing their kids to live at home, and another 49% pay monthly bills for them.* Both sides have good reasons. Most adult children are trying to save money and get student loans under control. The adjacent graph lists parents’ various reasons for continuing support.

FIRST: YOUR FINANCIAL WELL-BEING

While there are times when help is necessary, parents need to think of their financial health and overall well-being first. If you have an adult child who is still under your financial wing, you need to establish boundaries for your assistance.

SET EXIT GOALS

The best plan is to establish financial goals for when the child will become financially self sufficient up front. Or, if you’re already helping, the time is now.

Assistance might be provided until they save enough for housing, they can afford their student loan or car payments, their divorce settlement is worked out, or a similar financial milestone.

For a child with a health issue or addiction, consider talking with your legal advisor about a special needs trust, with funds going directly to the child’s treatment and recovery. And there’s nothing wrong with asking kids to contribute an affordable amount for their stay.

*Survey by Qualtrics for Credit Karma, November 2023

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Protect Your Security Data

Quite often, data security concerns surface when an employee leaves. But that’s not the only time your data may be at risk.

HAVE A PLAN

If you have yet to develop a data protection policy that applies to both new hires and existing employees, do so now. Part of that plan should include specific penalties for those who break the rules. Strive to limit the data employees can access to only what they need to perform their jobs.

On the other hand, avoid having online services and tools with credentials that are available to only one worker.

The plan should provide for quickly shutting off online services if needed.

BACK IT UP

Having a backup strategy in place and routinely backing up data is critical. With your backup strategy, consider services that can track remote systems and render them inoperable if you detect suspicious use.

REVIEW AND UPDATE CREDENTIALS

Be aware that even if sharing login/password information is against company policy, employees could be doing it to save time. Don’t forget contractors and consultants that have access to certain systems. You can’t be too careful with your company’s data.

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May 2024 Question and Answer

QUESTION:

A friend asked if he could rent our lake house for a couple of weeks in August. Are there any tax consequences if we do?

ANSWER:

Not if you observe the IRS’s short-term rental rules. You can rent out your personal residence (including a vacation home), and any money earned from the short-term rental isn’t subject to income tax if the rental doesn’t exceed 14 days in the tax year.

There’s a caveat, though. The rental income becomes taxable if you rent your personal residence for more than 14 days total during any tax year. So, take care to keep accurate records of your rental.

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The Market’s Obsession with the CPI

Lately, it seems the stock market has become obsessed with Consumer Price Index (CPI) reports, hanging on the release of every new report. You may be wondering why.

FIRST: WHAT THE CPI IS

The Bureau of Labor Statistics releases a CPI report each month. It’s based on price data collected over the month. The prices for the goods and services the BLS uses to calculate the index are collected from about 23,000 retail and service establishments in 75 urban areas throughout the US. Rent data comes from about 50,000 landlords or tenants. Weightings for items are set from reported expenditures as estimated by the Consumer Expenditure Survey.

IT’S ALL ABOUT INFLATION

The markets weren’t that sensitive to the CPI when inflation was low and steady. But since inflation reached a record high in 2022, the Federal Reserve repeatedly increased central bank rates, which affected the market. That’s because higher rates could cause the economy to fall into a recession, impacting the markets and investors’ returns. Your financial professional can suggest ways to diversify your investments to help minimize the effects of market volatility.

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May 2024 Client Profile

Sharon, an independent real estate broker, has recently joined the growing number of gray divorcees (people divorcing later in life). She’s looking at what she faces and how to handle her new status.

Fortunately for Sharon, she made an agreement with her ex-husband that her business wouldn’t be part of marital assets for distribution in any divorce settlement. That doesn’t necessarily mean business as usual.

She should keep work and divorce activities separated on her computer and use only her personal email for divorce correspondence. More than ever, she should maintain detailed records to ensure that capital contributions and their sources are recorded to the business.

Sharon will also inventory all her assets and investments and review her goals to update her personal financial and retirement plans — including changing her beneficiary designations. And she has an appointment with her attorney to rewrite her will and update her other estate-planning documents.

Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.