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    Using a Cash Balance Plan to Play Retirement Catch-up

    The Conflict

    A prospective client was having a record year for sales and profits. However, the company had no retirement program. The two principals were 60 and 54 respectively and there were four other employees. As the company currently had no retirement plan, neither of the owners had saved much for retirement, in fact both had saved very little as they had always put excess profits back into the business. With the company enjoying good fortune, the owners’ new goal was to maximize contributions for themselves while also providing a retirement savings vehicle for their four employees.
    MGO obtained the census information for all the employees including the owners and prepared an analysis.The 401(k) safe harbor by itself enabled the two owners to get $56,500 each in total retirement plan contributions, but there was a desire to do more.
      Compensation 401(k) Plan Contributions
    Owner 1 $250,000 $56,500
    Owner 2 $250,000 $56,500
    Employees $300,000 $15,000


    The MGO Solution

    By adding a cash balance pension plan in addition to the 401(k) plan, the owners could significantly increase contributions while only increasing employee costs by $10,000.
      Compensation 401(k) Cash Balance Total
    Owner 1 $250,000     $56,500    $200,000     $256,500    
    Owner 2 $250,000     $56,500    $175,000     $231,500    
    Owners' Total       $488,000    
    Employees $300,000     $15,000    $10,000     $25,000    


    For an employee cost of $25,000, the owners can contribute $488,000 in contributions saving $180,000 in tax.

    The Results

    The client chose MGO and implemented a 401(k) and cash balance plan. Today the client is saving a significant amount on income taxes, providing a nice benefit for employees while providing significant retirement benefits for the owners.