Cash balance plans offer partners and owners of highly profitable businesses an option to ramp up their retirement savings through large pre-tax contributions. Contributions to these plans are age-dependent, so the older you are, the more you can potentially sock away for retirement.²

How does this differ from a traditional defined benefit plan? In a cash balance plan, a business or professional practice maintains a hypothetical account balance for each employee. Employees get periodic statements showing their “balances”.

Every year an employee participates in the plan, he or she collects pay credits and interest credits. (The interest rate for a cash balance plan is commonly linked to the 30-year Treasury.) When the employee retires, the plan pays out either a lump sum or a pension-style income. Cash balance plans are portable: the vested portion of the account balance can also be paid out if an employee leaves before retirement.³

As an example of how credits are accrued, let’s say an employee named Joe Green earns $75,000 annually at the XYZ Company. He participates in a cash balance plan that provides a 5% annual salary credit and a 5% annual interest credit once there is a balance. Joe’s first-year pay credit would be $3,750 with no interest credit as there was no balance in his hypothetical account at the start of his first year of participation. For year two (assuming no raises), Joe would get another $3,750 pay credit and an interest credit of $3,750 x 5% = $187.50. So at the end of two years of participation, his hypothetical account would have a balance of $7,687.50.

Per Internal Revenue Code Section 412, an employer must make annual contributions to a cash balance plan. Each year, an actuary must make valuations to determine the current value of a participant’s accrued benefit and the minimum yearly contribution.

Designing the plans. Cash balance plans have to meet some basic tests.

• They must be non-discriminatory (they can’t be structured to favor executives).
• Allocations to plan participants must meet IRC Section 415 standards.
• Allocation formulas must be in line with the IRC’s top-heavy required minimum contribution (if relevant).
• Plan contributions must be in amounts deductible by the business per IRC Section 415.⁴

Assuming those tests are met, there are some compelling reasons to adopt a cash balance plan in place of a traditional defined benefit plan.

Two major advantages. A cash balance plan can give business owners the chance to keep any excess profits earned above the annual interest credit owed to employees. Additionally, the company has a consistent payment stream to direct to its retired employees, plus designated hypothetical accounts set up for that purpose.³

An alternative to the safe harbor formula. A safe harbor formula can help a traditional defined benefit plan avoid charges of age discrimination, yet it has a downside: it tilts greater amounts of money to a company’s longest-tenured workers, leaving less for owners. In cash balance plans, the oldest and youngest employees simply collect credits that represent either a percentage of pay or a flat dollar amount.^5,6

Benefit allocations based on career average pay, not just “the best years”. In a traditional defined benefit plan, the eventual benefit is based on a 3- to 5-year average of peak employee compensation multiplied by years of service. In a cash balance plan, the benefit is determined using a career average pay formula – an average of all years of compensation.⁶

Less sensitivity to interest rates. When rates rise and fall, liabilities in a traditional pension plan fluctuate, opening a door to either overfunding or underfunding (and underfunding is a major risk right now with such low interest rates). By contrast, a cash balance plan has relatively minor variations in liability valuation.⁶

Are there any demerits to these plans? Well, they often have greater administration costs than traditional defined benefit plans. The IRS terms these plans “individually designed”, so you have to submit them for IRS approval every five years instead of every six. They also require annual non-discrimination testing.⁶

Still, cash balance plans have grown increasingly popular. Some businesses have even adopted dual profit-sharing and cash balance plans. Maybe it is time your business looked into this intriguing alternative to the traditional pension plan.

DISCLAIMER:

Securities Offered Through First Allied Securities, Inc. MEMBER NASD/SIPC

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All indices are unmanaged and are not illustrative of any particular investment.

• Employment Classifications. The U.S. Department of Labor (DOL) has been increasing its compliance enforcement efforts, and employers must understand how to initiate proper assessment in various areas of wage and hour laws (e.g. employee vs. independent contractor, exempt vs. non-exempt, full-time vs. part-time).
• Health and Safety. Another area of DOL attention involves safe and productive workplace environments.  The federal Occupational Safety and Health Act (OSHA) requires covered employers to maintain a workplace that is free of hazards.  Having specific policies in place is a key part of the process.
• Social Media. With the increasing usage of social networking sites and technological equipment (i.e. smart phones), employers should remain mindful of how their employees are using the internet and thus how they may be promoting your business and the image of the company.  In addition, social media can cross barriers between confidentiality and privacy rights. So, a sound policy would be able to pinpoint the functionality and appropriate time frames that allow for social media usage during work as well as non-work hours.
• Telecommuting.  Telecommuting can be used as an important recruitment and retention tool, and more companies are allowing more workers to work remotely more often.
• Benefits.  Whether trying to stay on top of various health care reform laws, apply family medical leave updates, or provide vacation and sick leave time-off, it is vital for employers to ensure that their benefits-related policies remain current.

To be sure your Employee Handbook is up to speed, conduct a thorough review, at least, on an annual basis with the guidance from an HR Professional, if needed.

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Please note:  The article you just read was originally produced and written by the HR Pros of the HR Support Center, a strategic partner of MidwestHR, LLC

This generation may interact with your business and be perfectly happy with the transaction as a whole but in no way does this mean they’ll come back. Generation Z is led by communication (mainly online) and their attention will wander if you don’t communicate as efficiently as your competitors.

As a business owner, this means implementing a change in your customer communication strategy – mainly moving from traditional marketing (TV, radio, newspapers) to communication led by online and interactive content. The difference being that the former is very linear (it may get a message across to a wide group of people but that’s where the path ends), whereas the latter can get the message across to the same amount of people but it’s open to discussion, debate, sharing and therefore the growth of customer relations. Most importantly, it gives the consumer a public voice and is therefore a two-way (some would argue ‘real’) conversation.

This type of marketing and communication is most effective on social networks, however for business owners who want to make the change from traditional to digital communication a little more slowly, the first step is to create a blog. A blog will enable you to speak about your brand while not holding you to daily updates. It will allow your customers to respond publically and is a great way to build your online business profile as it can also be shared across social media (remember you don’t have to have your own business facebook page to be shareable across others!)

These changes in communication platforms can also be applied to those you do business with as well, not just your customers. It pays to build an online relationship with your affiliates and communicate using an open platform. Even as far as making sure you conduct all of your meetings face-to-face, be it using virtual solutions if not in person.

So, for all those new to online communication, now is the time to start making changes. When it comes to your customers begin with a blog and go from there. When it comes to your business associates, always think about more personal ways to build relationships – virtual solutions such as video conferencing can be the make or break of a budding business relationship.

John’s Contact Info:  847.426.3311 or jstraley@infinitywm.com

MidwestHR: What are the products and/or services that your company provides?
John Straley:  Infinity is a wealth management firm providing retirement and estate planning through strategic investment and insurance vehicles.

MHR: What are your company vitals?

JS: Location(s) – South Barrington, IL
JS: Number of years in business – 18
JS: Number of employees – 8

MHR: Who does your company specialize in working with?  Do you have a niche market?
JS: We have had great success working with the small to medium sized business owner, key employees and their families. One of our niches is the manner in which we collaborate with other advisors such as attorneys and accountants.

MHR: What sets your company apart from your competition?
JS: One of our distinctive competencies is to help our clients bridge the gap between their goals and dreams with present day realities.

MHR: What are the best ways for people to receive information/updates from your company (i.e. website, blog, twitter, etc)?
JS:  People can learn more about Infinity through our useful website; which has several topical articles and financial calculators. Also, you can subscribe to our free Monthly Economic Update that is delivered via email. Or, we always welcome your phone call to discuss any matters that are important to you.

MHR: What do you personally love about your job?
JS: I personally love to work with my clients and to help them find a solutions to their situation. Serving people has always been something that I find gratifying.

MHR: What is one thing about you that most people don’t know?
JS: I make great homemade pizza! I prepare from scratch the dough, sauce and even the Italian sausage. Also, in the winter time I hang dry salami.

MHR: What is your favorite…?
JS: Book – The Bible
JS: Movie -The Shawshank Redemption
JS: Type of Music – Classic Rock
JS: Food – Italian

MHR: Away from work, what do you do for fun?
JS: I enjoy golfing, boating, sporting events and musical performances especially when my kids are playing or performing.

MHR: If you could travel anywhere in the world, where would you go and why?
JS:  I would like to visit the small town in Sicily where my Mother was born and lived in an orphanage for much of her youth.

Enter Doctor #1

At this point you begin taking notice of your fellow patrons and think “well my sales coach is always preaching to me about the 3 foot rule” so you catch the eye of the gentleman in front of you in line and you say “So, when you aren’t standing in line growing old, what do you do for a living?”  He replies “I’m a Doctor.”  For the next minute or two he tells you he’s a general practitioner who specializes in geriatrics (old folks), where his office is located and other tidbits. He seems credible, seems to know what he is talking about but quite frankly you have NO way of knowing if he really is a Doctor or not!

Search Lesson 1 – The Doctor’s story is analogous to a website. As a website owner you can tell any story you want on your website but Google, Yahoo and BING have no way to know from your site alone whether or not your story is true.

Enter Doctor #2

Thankfully the line is moving again! You are just 3 people away from getting that shot of afternoon motivation you originally came for!  You continue to exchange pleasantries with the your new Doctor friend when all of the sudden a second person who actually looks like a Doctor comes in the door and greets your Doctor friend. They talk shop about a recent referral your Doctor friend made to Doctor #2.

Search Lesson #2 This second Doctor is analogous to a “relevant back link”.  If you had any doubts as to whether or not your new friend really is a Doctor, having this independent verification has helped remove it.  In the eyes of the search engines, having a totally separate, relevant site reference your website helps them to believe that your website is telling the truth.

Enter A Group of Senior Citizens

At this point your Doctor friend has paid and you’ve placed your order!  As he turns to leave he hands you a business card and you say goodbye.  You then notice that a shuttle bus from a local retirement complex has arrived and a half dozen older men and women shuffle in.  Each of them says “Hi Doctor Jones” as the Doctor walks out the door.  You have no idea who these people are, but now with 7 separate, independent verifications you have no doubts that the person you spoke to is really a Doctor.

Search Lesson #3 These 6 senior citizens are analogous to “back links” from non-relevant sites. Google, Yahoo and BING looks for these types of verifying links to help them understand whether or not your site is being truthful and to help them identify how popular your site is and how much of an authority it is.

1 Week Later

You find yourself talking to a friend who mentions that her Mom is looking for a new Doctor.  It seems her old Doctor has retired and moved to Florida.  She mentions that she is looking for a geriatric specialist. You tell her that you just met a really nice geriatric specialist named Dr. Jones and you pass along his contact information.

On-Site and Off-Site Authority

Hopefully my explanation above clears up just how the search engines work.  You need to make sure that your website is designed to sell, has good content and has been fully optimized.  If you get these “on-site factors” right you will tell the best story possible to the search engines. Most experts agree that getting this right will account for 10 -30% of your site’s ability to rank highly.  The remaining 70 -90% of your site’s ability to rank comes from consistently building your site’s “off-site” authority. The more consistently you gain “votes of confidence” the more likely you are to be the #1 ranking site for your most important buying phrases.