Now is the Time for Retirement Plan Decisions

Many successful companies (especially professional firms like medical groups and law firms) are considering whether to increase retirement plan deductions for 2011. This post highlights the action steps to take while there’s still time.

Note: We’ll be focusing on cross-tested profit sharing plans and cash balance plans. These plans allow owners to make large tax-deferred retirement contributions in exchange for providing a generous employee retirement allocation (usually 5% of pay if there’s only a profit sharing plan, or 7.5% of pay if there’s a cash balance plan too).

1. Get educated before diving in. Before setting up a retirement plan, you need to understand all of the rewards, risks, and costs. Our “Eyes Wide Open” post is a great place to start. You can also find lots of information by googling a phrase like “cash balance plan FAQ”.

2. Know your deduction goals and be realistic. There are various levels of deductions available in an employer-sponsored retirement plan. Move on to “the next level” only if you have maximized lower-level deductions. We’ve written an article that summarizes the “big, bigger, and biggest” retirement plan deduction opportunities.

You should work with a qualified retirement plan consultant to analyze which options will work best for you in the long run (e.g., if income varies significantly from year to year, then profit sharing is better than a cash balance plan). A recent article provides a good summary of the pros and cons of different retirement plans along with examples.

3. Get started now. If you want to set up a plan and make deductions for 2011, then it must be in place (with a signed plan document) by December 31. For profit sharing and cash balance plans, you’ll have until until September 15, 2012 to make contributions for the 2011 plan year.

If you’re focusing on a new plan for 2012, it’s still a great time to get the ball rolling. Having a plan in place early in the year ensures that you have more time to set aside assets to contribute. It’s especially important to get a safe harbor 401(k) plan [which often complements a cash balance or profit sharing plan] set up now because IRS rules require you to notify employees at least 30 days before the new year (i.e., by the end of November).

Profit sharing and cash balance plans can be great tools for business owners to make significant tax-deferred retirement contributions. The deadline for establishing a plan in 2011 is fast approaching, so now is the time to take action.


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