Pros and Cons of Retirement Plans Available to Small Businesses (Part 3 of 3)

Share on facebook
Share on google
Share on twitter
Share on linkedin
Here’s a look at some of the alternative qualified plans that often go under the radar:

Unsplash-Jennifer RegnierAs we discussed in the first two parts of this blog, retirement plans offer significant tax advantages to small business owners and give both you and your employees a significant incentive to save for the future.

In the first part, we identified the factors—depending on your company’s size and retirement objectives—to consider when choosing a plan. We also gave you an overview of SEP and SIMPLE IRA plans.

In the second part, we looked at 401(k) and Solo 401(k) plans

As we explained previously, this blog isn’t an attempt to give you enough information to make a final decision. It should help you become familiar with the various plans, so you are better prepared to discuss them further with you CPA or another financial advisor.

Here’s a look at some of the alternative qualified plans that often go under the radar:

Cash Balance Plans

A Cash Balance Plan (CBP) is a specific type of Defined Benefit Plan.


  • Available for any type of business entity
  • Can be offered in conjunction with a 401(k) Profit Sharing Plan
  • Allows business owners to contribute significantly more money on a tax-deductible basis than a 401(k) Plan alone
  • An individual can accumulate $2.8 million by age 62
  • Annual contributions determined by age, compensation, and the investment performance of the plan
  • A business owner’s spouse working for the company and paid a salary may be included in both the 401(k) Profit Sharing and the Cash Balance Plan
  • Qualified plan assets are eligible for annuity payouts at retirement or can be rolled over to an IRA or 401(k)


  • Deductible 401(k) contributions may be limited if the employee is participating in a 401(k) sponsored by another employer
  • Contributions are generally required every year
  • Contribution amount determined by an actuary
  • Most plans have a waiting period for new employees
  • Permanency requirements discourage plan termination
  • Plan administrator must work with an investment advisor

 Voluntary After-Tax Employee Contributions

If a plan allows additional investment of money that is not deferred from payroll and not contributed by the employer, this money will be “after tax”.  In other words, these contributions are made from funds that the employee must include in income on his or her tax return.


  • Increases the amount of money in the plan
  • Taxes on profit from the plan investment are deferred until paid out


  • You must pay taxes on the funds
  • You can’t deduct the funds you contribute after-tax from your tax return

Qualified Plans

All the retirement plans we mention in this 3-part blog are considered Qualified Plans. Qualified Plans is a general phrase describing the job-related retirement plans the IRS recognizes.

Per the IRS: “A qualified plan must satisfy the Internal Revenue Code in both form and operation. That means that the provisions in the plan document must satisfy the requirements of the Code and that those plan provisions must be followed.”

Generally, there are two general types of Qualified Plans:

  1. Defined Benefit Plans
  2. Defined Contribution Plans

Defined benefit plans—commonly referred to as pension plans


  • Employees receive a steady income stream at some point in the future, commonly based on earnings history and length of service


  • Employers must contribute enough to the defined benefit plan each year to satisfy what’s known as a “minimum funding requirement”
  • Complexity of the minimum funding calculation and other requirements—administration generally requires professional assistance from an actuary

Defined contribution plans—including profit sharing and money purchase plans

  • Employers contribute into individual accounts for each employee
  • Employees generally have the authority to invest the money, choosing among the investment options provided by the plan
  • No requirement for immediate vesting

Under a profit sharing plan, an employer’s contributions are discretionary. Under a money purchase plan, contributions are mandatory, and the contribution percentage used to determine the contribution amount must be the same every year.

0/5 (0 Reviews)

Prepare Now for Natural Disasters

Disaster proofing your personal and business financial and tax records is as important as stocking up on batteries and bottled water.

Read More

Not Going to College Isn’t a Good Excuse for Not Succeeding

Some of the best known and most successful entrepreneurs had little or no time in a college classroom.

Read More

When the Corporate You Needs to Say No to the Personal You

One of the hardest things many small business owners and entrepreneurs need to overcome is the urge to “let the company pay for it.” Whatever the” it” is.

Read More

Business Expenses to Track This Year for Tax Deductions

Legitimate tax write-offs are critical to growing your business and maximizing your company’s bottom line.

Read More
Share on facebook
Share on twitter
Share on linkedin

Leave a Comment

About Us

Since 1981, we bring measurable results to business owners who want to preserve wealth, boost operating capital, minimize their tax burden, and soar in today’s challenging business environment.

Recent Posts

Sign up for our Newsletter

Scroll to Top
%d bloggers like this: