Orthotown November 2017 - 40

contribution limits. The second way is through the
potentially significant tax savings that can be claimed
by the practice owner(s) when adjusted gross income is
reduced by plan contributions. With this one-two punch,
the practice owner's taxes can decrease substantially
compared to a 401(k) plan.
Unlike other defined benefit plans, a cash balance
plan has more flexibility. If a practice has unexpected
expenses, or there is a decline in business revenue, the
plan owner has the option to put in less money.

Who is it for?
Cash balance plans work best for practice owners
who want at least $60,000 a year in tax deductions. In
addition, these plans are particularly advantageous for
docs age 50 or older, because they are likely to have
the means to make larger plan contributions and, as
a result, reap the greatest returns. When it comes to
practice size, smaller is better because fewer employees
means the owner keeps more of the money that goes
into the plan and, of course, the resulting tax savings.
There are certain IRS non-discrimination testing
requirements, which determine which employees must
be included in a cash balance plan. Consult with your
financial professional for more details.

Investment vehicles
In a cash balance plan, investment vehicles are
usually in two categories: securities, such as stocks or
mutual funds, and a whole life insurance policy that
normally pays a guaranteed growth percentage (4-4.5
percent per year). The death benefit payable by the
insurance policy is a key element of the plan, because
in the event of the practice owner's death before the
plan is fully funded, the life insurance proceeds would
make up the difference in plan proceeds.
Another advantage of the life insurance component is
that the cash value inside the life insurance policy can be
used to create a stream of tax-free income in future years.

Step-by-step setup
1. An employee census is prepared. This census
must include every employee, including the
owner, and show each employee's date of birth,
length of employment and income for the
previous three years. This census is then provided
to a third-party administrator (i.e., actuary),

NOVEMBER 2017 // orthotown.com

who performs an analysis that determines the
contribution level for each employee participating
in the plan.
You and your financial advisor then determine
the investment vehicles that will be included
in the plan, usually whole life insurance and
conservative stocks.
Documentation required for the plan is completed. All plan documents must be signed by the
end of calendar year in which tax deductions are
claimed.
The plan is funded. The practice owner has
until the tax payment deadline (including any
extension) to make the first annual contribution.
Each year moving forward, the third-party
administrator prepares annual documentation
needed by the IRS. In addition, the practice
owner and plan participants receive a statement
showing how their individual plan contributions
and value are growing.

Running the numbers
The annual contribution to a cash balance plan
depends on the age of the practice owner and his or
her income. Usually $250,000 is the recommended
maximum. If the practice owner is five years from
retirement, $250,000 each year in pretax contributions
is a sure-fire way to catch up. By contrast, with a 401(k)
plan, the practice owner would be limited to fraction
of that amount.
Cash balance plans do come with administrative
costs, most of them related to the time spent by the
actuary in constructing the plan (which includes
conducting the employee census), drawing up plan
documents and preparing annual tax returns. The level
of administrative costs corresponds to the number of
employees participating in the plan. On average, setup
charges run around $3,000 and annual administration
fees are about the same amount.
Experts agree that for older, successful practice
owners, the tax advantages of case balance plans far
outweigh the costs if the contributions are done correctly.
On the investment portion of the cash balance plan,
investment management fees range from 1-1.5 percent
on assets. Some business owners who love the stock
market are able to reduce brokerage fees by handling
their plan's stock investments personally.

http://www.orthotown.com

Table of Contents for the Digital Edition of Orthotown November 2017