On the silver side, the contribution limit for 401(k) plans in 2011 is $16,500 plus another $5,500 for plan participants who are age 50 and older.  The silver is a little tarnished, though, because only 7 percent of participants ever come within $500 of the limit, according to a Financial Engines survey.  Frankly, most participants never contribute anywhere near the limit.

On the gold side of the coin are business owners and professionals who may be able to accumulate as much as $49,000 annually by implementing advanced defined contribution plan designs and significantly increasing employer contributions.  Yet, the gold does not shine brightly enough for the most affluent who still struggle to accumulate enough assets to continue their comfortable lifestyles when they vacate the “C” suite. 

Business owners and professionals who earn high six-figure and seven-figure incomes need help from a financial adviser in finding new ways to set aside greater portions of their paychecks.  One of those ways is to establish a cash balance defined benefit plan to complement a defined contribution retirement plan with an advanced design.  The combination may result in as much as $250,000 being earmarked annually for retirement benefits to fund the plan’s liabilities as a whole.

Cash balance plans are becoming increasingly popular. As of 2007, the most recent year for which data is available, there were 4,797 active cash balance plans, according to the Internal Revenue Service.  That represents a 359 percent increase from 2001, the IRS reports.  So why the dramatic increase?

Owners of successful businesses and professional practices are learning that cash balance plans can help them enhance their retirement benefits while potentially reducing their taxable income. If you’re a baseball fan (or a doctor, dentist or lawyer), that’s akin to winning a double header.

Cash balance plans can also help “balance” the risk inherent in equity-oriented retirement investments.  Unlike a defined contribution plan, the plan participant does not bear the investment risk within a cash balance plan.

As previously mentioned, employer-funded contributions made to the cash balance plan may generally be deducted on the firm’s federal- and, where applicable, state-income tax return.  And the special rules for cash balance plans allow their benefits to be more heavily weighted in favor of business owners and key employees than they can through defined contribution plans, provided certain requirements are met.

But keep in mind that a cash balance plan is not a perfect fit for every business.  These defined benefit plans must be funded by an employer annually, which can mean a significant financial commitment.  Not every business owner has the financial wherewithal or the desire to accept such an obligation.

Nevertheless, there are plenty of firms with advanced plan designs that are ready, willing and able to squeeze more out of their retirement plans.  You can locate many of these firms by tapping public data bases such as freeerisa.com, larkspur.com and many others.  The search should focus on those commercial or professional entities that already have retirement plans with advanced designs.

You will find that the principals of many of these firms want and need to set aside significant amounts of coinage for retirement.  For them, the two-sided coin of retirement planning shines brighter on both sides.

E. Thomas Foster Jr., Esq., is The Hartford’s national spokesperson for qualified retirement plans. Foster works directly with broker/dealer firms and advisers to help them build their qualified retirement plan business and educate them about industry issues.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. This information cannot be used or relied upon for the purpose of avoiding IRS penalties. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

Cash balance plan designs are complex and require the assistance of a financial professional and third-party administrator.  Additionally, cash balance plans require annual employer funding and they may not be suitable for some businesses.  The Hartford’s materials highlight cash balance plan advantages, but certain restrictions and limitations will apply based on plan design and retirement plan rules, among other factors, which may affect tax deductions, funding levels and distributions of plan benefits. 

Many tax planning strategies emphasize the deferral of current income taxes, on the basis that your federal income tax rate may be lower at retirement.  Please keep in mind that federal income tax rates are unpredictable and may be higher when you take a distribution than at the time of deferral.  Other factors, including state tax rates and your income, may also affect your overall tax rate upon distribution.  Please consult with your tax advisor for individual tax planning strategy and advice.  The Hartford does not predict or in any way guarantee favorable tax results.