Frequently Asked Questions
What is a pension actuary?
What kinds of retirement plans are there?
What is a Cash Balance Plan?
I have a 401(k)/Profit Sharing Plan, why should I set up a Defined Benefit/Cash Balance Plan?
How much could I contribute to my plan?
Are contributions to the plan mandatory?
I have employees other than myself. Do I have to cover them in the plan?
What happens if participating employees are terminated?
Can a plan be amended?
Can I change my annual contribution amount over time?
When can I retire?
How would I terminate my plan?
What is non-discrimination testing?
What are Required Minimum Distributions?
How is the money invested?
How much does setting up and maintaining a pension plan cost?
How can I start a pension plan for my business?
What is a pension actuary?
Actuaries prepare the calculations and documentation necessary for setting up and administering a pension plan, in addition to performing general actuarial consulting such as Cash Flow Modeling and assisting with IRS and DOL audits.
What kinds of retirement plans are there?
There are two major types of plans: Defined Benefit and Defined Contribution. In a Defined Benefit plan, the IRS sets limits on the maximum benefit that can be paid out at retirement. This includes plans such as traditional Defined Benefit and Cash Balance plans.
In a Defined Contribution Plan, the IRS sets limits on the maximum amount that can be contributed each year. This includes plans like SEP’s, SIMPLES, Profit Sharing Plans, and 401(k) Plans.
What is a Cash Balance Plan?
A Cash Balance Plan is a type of defined benefit plan. It is considered a “hybrid” plan because it has some characteristics of a defined contribution plan (401(k) & profit sharing plans).
A Cash Balance plan, unlike a traditional DB plan, does not use a formula to determine the guaranteed benefit. The benefit in a Cash Balance Plan is derived from the participant’s “hypothetical account”, which is made up of Pay Credits and Interest Credits. A Pay Credit can be a flat dollar amount or a percentage of pay. Interest Credits are determined by multiplying the hypothetical account balance by an interest rate. Pay Credits and Interest Credits are credited to a participant’s account at the end of each plan year. The benefit at any time is equal to the sum of the Interest Credits and Pay Credits.
I have a 401(k)/Profit Sharing Plan, why should I set up a Defined Benefit/Cash Balance Plan?
A traditional Defined Benefit or Cash Balance Plan typically has significantly higher deductible contribution limits. Additionally, most new Cash Balance Balances are designed to be combined with a 401(k) Profit Sharing Plan. Combining Cash Balance and Profit Sharing plans allow the plan sponsor to allocate the majority of plan contributions to the Owner or other key employees. Owners and key employees generally receive the majority of their benefits from the Cash Balance Plan, while rank-and-file employees receive the majority of their benefits from the Profit Sharing Plan. The two plans are combined for non-discrimination testing.
How much could I contribute to my plan?
There are several factors that determine annual contribution amounts, including your age, annual compensation, age at retirement, and years of past service in your business. To get an estimate of a maximum annual contribution amount, see our Contribution Calculator.
Are contributions to the plan mandatory?
In a defined contribution plan, annual contributions are discretionary – you can choose how much you contribute up to the IRS limit within 8 ½ months after the end of the plan year. In a defined benefit plan, annual contributions are mandatory and must be made within 9 ½ months after the end of the plan year. This mandatory amount is determined annually by the actuary.
I have employees other than myself. Do I have to cover them in the plan?
In a Defined Benefit plan, eligible employees must be covered, though not necessarily at the same benefit level as owners, as long as non-discrimination testing is satisfied. Typically, eligibility requirements in a plan include 1 year of service and 1000 hours to prevent part-time employees from entering the plan.
What happens if participating employees are terminated?
When a participant is terminated, they will receive their benefit owed to them under the plan. We prepare the necessary forms and calculate the amount owed. Typically, participants to have a certain amount of service years to be fully entitled to their benefit, and thus may only be entitled to a portion or none of their benefit by the time they are terminated.
Can a plan be amended?
Yes. The plan can be amended to decrease or increase (if not already at the maximum allowable) the benefit formula. This may be beneficial or necessary if a significant increase or decrease is expected in available assets to be contributed to the plan. Other amendments, such as expected retirement date, can also be done, as long as IRS regulations are still satisfied.
Can I change my annual contribution amount over time?
Yes, to an extent. As long as your contribution is in the allowed range (calculated by the actuary annually), contribution levels can definitely vary from year to year. If a large increase or decrease in required contribution amount is desired, the plan benefit formula can be amended.
When can I retire?
You can terminate the plan at any point and rollover the assets to an IRA. However, it is typically recommended to maintain the plan for at least 5 years. The earliest possible retirement date is at age 55.
How would I terminate my plan?
We would submit final filings to the IRS and calculate the benefit owed to you (and participating employees) under the plan. Depending on your age and retirement at termination, you could begin receiving your benefit in various forms, or rollover the assets to an IRA.
What is non-discrimination testing?
Non-discrimination testing is only necessary for businesses with employees. These annual tests demonstrate that the benefits from a pension plan provide comparable benefits for Owners, key employees and rank-and-file employees. If a business has multiple plans (such as a Cash Balance Plan and a Profit Sharing plan), the combined benefits from both plans are considered.
What are Required Minimum Distributions?
Like IRA’s, qualified plans require that a minimum distribution is taken out of the plan annually, beginning at age 70 ½.
How is the money invested?
You can open an investment account at an investment firm of your choice. You or your authorized financial representative can make all investment decisions. There are few limits to investment options, but these restrictions do not allow for uncovered options, collectibles, or anything without available market value. Plan assets can be invested in real estate, but this is not recommended, as liquidity difficulties may prevent you from paying out a benefit in a timely manner.
How much does setting up and maintaining a pension plan cost?
We provide our plan set up and administration services on a flat fee basis, but we generally do not publish our fees. Click here to request a formal fee quote for your business.
How can I start a pension plan for my business?
To see how your maximum contribution amount and get a quick estimated proposal, click here.
To get a formal pension plan proposal for your business or client, please download and return our Proposal Request Form.
