Cash Balance Pension Plan and 401(k) Plan Deduction Limits

Defined Benefit Plans: Cash Balance Pension Plans

In a type of Defined Benefit Plan called Cash Balance Pension Plans, the deduction limit is based on actuarial factors as well as minimum funding standards that apply. The existing rules provide stricter funding standards and encourage plan sponsors to generously fund the plan.

Key Points:

• Minimum Funding Requirements: Employers are required to contribute a baseline amount to keep the plan solvent.
• Flexibility for Employers: Additional contributions can be made beyond the minimum to boost the plan's value, depending on the company's profitability.

Example: Imagine XYZ Corp, with a Cash Balance Pension Plan, decides to exceed its minimum funding requirement after a profitable year. If the minimum funding requirement is $50,000, XYZ Corp could contribute an additional $230,000 for the maximum annual benefit. This extra funding not only enhances future payouts for employees but also offers tax deductions for the owner of the company (The annual funding limit depends on the age and the salary of the employee). 

Defined Contribution Plans: 401(k) Plans

401(k) plans are essential tools for retirement savings, allowing pre-tax contributions from employees, matched by employers in many cases.

Key Points:

• Contribution Limits: For 2025, the limit for employee elective deferrals in 401(k) plans has been raised to $23,500.
• Total Contribution Ceiling: This total increases to $70,000 for employees under 50 years of age, and to $77,500 for those over 50 due to catch-up contributions.

Example: Consider Lisa, the owner of ABC Manufacturing. She earns $120,000 a year and decides to maximize her 401(k) contributions in 2025. She defers $23,500 into her 401(k). With her age over 50, she also adds $7,500 as a catch-up contribution. If ABC Manufacturing matches 50% of employee deferrals up to 5% of their salary, Lisa would receive an additional $6,000 from her company, totaling $37,000 for the year.

Catch-Up Contributions: These allow employees over 50 to contribute additional funds to their 401(k) plans, providing an opportunity to increase retirement savings later in their careers. For those aged 50 to 59, the catch-up contribution limit is $7,500. Additionally, under the SECURE 2.0 provisions, employees aged 60 to 63 can contribute even more, with a higher catch-up limit of $11,250 for 2025. This enhanced contribution is designed to help those nearing retirement accelerate their savings, offering a substantial boost to their retirement funds.

Strategic Considerations:  Blending Cash Balance and 401(k) plans within your business can significantly enhance retirement benefits, making your company more attractive to top talent.

Regulatory Compliance: Maintaining adherence to IRS guidelines not only avoids penalties but also ensures a trustworthy business environment.

Conclusion

Understanding Cash Balance Pension Plan contribution limits and their impact on retirement planning is vital for business owners. By following these guidelines, companies can maximize their contributions, comply with tax requirements, and provide good retirement benefits for employees.

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