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TAX / PERSONAL FINANCIAL PLANNING

in a CBP is determined by the account balance of how well the plan’s investments have performed.
— and these are often referred to as “hypotheti- In other words, the plan’s gains or losses on its
cal accounts” because they do not reflect actual investments do not alter the participants’ promised
contributions or gains/losses incurred. Participants benefit amounts. The employer alone directs the
are entitled to the amount accumulated in the investments and bears the investment risk.
hypothetical account when they retire regardless In terms of operation, the employer annually
credits each participant’s account with a “pay credit”
(e.g., 4% of annual compensation) and an “interest
AICPA RESOURCES credit” (a fixed interest rate return or index-linked
variable rate). The employer targets the plan’s invest-
Articles
ments to cover these financial obligations. Because
“5 Key Benefits of Cash Balance Plans,” The Tax Adviser, Sept. 2018 the benefit is stated in terms of an account balance,
“Why Small Business Owners Should Have a Qualified Retirement Plan,” CBPs eliminate much of the actuarial uncertainty
Tax Insider, July 19, 2018 that has affected traditional defined benefit plans.
CBPs have grown in popularity in recent years,
“Cash Balance Plans for Professional Practices,” JofA, March 2015
with more than 10,000 plans in place covering
Podcast episode over 10 million participants in 2019, according to a
“Building Business Owner Wealth With Tax Advantaged Plans,” AICPA PFP recent analysis. Many blue chip companies, medical
Section, Sept. 9, 2022 firms, and law firms in the United States offer them
Online resource to employees. The vast majority of CBPs cover 100
or fewer participants, so it is clear these plans are
Cash Balance Plans Primer
mainly used by small businesses. The number of
For PFP Section members these small-sized plans more than tripled over the
Guide to Financial and Estate Planning, Vol. 2 past decade.
For successful small businesses and profes-
PFP Member Section and PFS credential
sional practices, CBPs can significantly reduce tax
Membership in the Personal Financial Planning (PFP) Section provides access liabilities and accelerate owner retirement readiness.
to specialized resources in the area of personal financial planning, including Some factors indicating that this type of pension
complimentary access to Broadridge Advisor. Visit the PFP Center. Members plan may be right for a client can be found in the
with a specialization in personal financial planning may be interested in
applying for the Personal Financial Specialist (PFS) credential. sidebar, “Which Clients Benefit Most From Cash
Balance Plans?”

IN BRIEF retirement can choose an annuity who want to accelerate their retirement
based on the cash balance that has savings. These plans also help to attract
■ A cash balance pension plan (CBP) accumulated in the hypothetical account and retain talented employees.
is a defined benefit plan that has or, alternatively under most plans, a lump ■ Participants in a CBP can deduct the
some characteristics of a defined sum that can then be rolled over into annual cash balance contributions, and
contribution plan. Unlike a traditional an IRA or, potentially, another employer the investments grow tax deferred. In
defined benefit plan in which an retirement account. The employer alone addition, plan contributions can reduce
individual who retires is promised a directs the investments and bears the state and local taxes. For the business,
monthly payment for life, a CBP defines investment risk. the contributions are deductible
a participant’s retirement benefit ■ The vast majority of CBPs are found expenses.
in terms of a hypothetical account in small businesses. Because these ■ Operating a CBP requires a
balance. This balance is based on an pension plans enable participants to custodian who holds the plan’s
annual “pay credit” (e.g., 4% of yearly make larger yearly contributions than assets, a recordkeeper, a third-party
compensation) and an “interest credit” other types of retirement plans such as administrator, and an investment
(a fixed interest rate return or index- 401(k)s, they have become increasingly manager.
linked variable rate). popular with successful small business
■ A plan participant who begins owners and high-earning professionals

To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.

28 | Journal of Accountancy January 2023