By Allison L. Evans and James H. Irving
Understand the rules for this leading form of retirement benefit.
Cash balance plans offer owner-employees in professional practices a vehicle to defer tax on income well in excess of the annual contribution limits of traditional Sec. 401(k) and profit sharing plans. This option has become increasingly valuable since the total tax burden on owners of unincorporated, flow-through business entities increased in 2013.
Cash balance plans, often referred to as hybrid retirement plans, are defined benefit plans that in many ways resemble defined contribution plans. The number of active cash balance plans (those without zero participants) rose 70% between 2008 and 2012, and those plans held more than $800 billion in assets in 2012. Professional practices currently account for the majority of cash balance plans, with the highest concentration in the medical field. Cash balance plans are especially appealing to this demographic (e.g., doctors, dentists, lawyers, and accountants) because these professionals often earn much-higher-than-average annual salaries and get a later start in accumulating personal retirement savings.
Allison L. Evans CPA, Ph.D. (email@example.com) is an assistant professor of accountancy at the University of North Carolina–Wilmington. James H. Irving CPA, Ph.D. (firstname.lastname@example.org) is an assistant professor of accounting at Clemson University in Clemson, S.C
This article originally appeared in the March edition of Journal of Accountancy.