Cash Balance Plans for Business Owners
The new tax law is a lucrative opportunity for many pass-through businesses. As long as the owner’s income does not exceed a certain threshold, businesses can earn significant tax savings. In this installment of CenterStage, Todd Yawit – the director of retirement services at Saxon – has provided the following insightful information on Cash Balance Plans and how they can be used to help businesses earn significant tax savings.
The New Tax Law
With the new tax law, some business owners can now deduct up to 20 percent of their qualified business income (QBI) as long as their income falls below a certain threshold. Todd explained, “The new tax law that went into effect treats certain business types differently than it used to. In order to take advantage of the full deductions, certain business owners might need to lower their income to accommodate getting the deductions.”
deductions.” The full 20 percent deduction is available to companies that have an income that falls below the set threshold amount. Because of this, many businesses will have lower effective tax rates. Business owners whose income does not fall below the set threshold amount can still reap significant benefits by placing the difference of their income in a Cash Balance Plan. This will cause their taxable income to fall below the set threshold.
What Are Cash Balance Plans
Cash Balance Plans are a type of retirement plan that combines the maximum benefit amount associated with Defined Benefit Plans with the flexibility and portability of a 401(k) plan.
Cash Balance Plans are trustee directed and assets are invested into a single pool. Participants receive individual statements with hypothetical account balances on them.
Cash Balance Plans are often preferred over traditional Defined Benefit Pension Plans. Individual statements received by participants reflect what participants could potentially collect in the form of a lump sum, if eligible.
Here are the top 6 features of a Cash Balance Plan:
- Niche Retirement Plan – Cash Balance Plans are a great fit for physician groups, dental groups, and other professional practices, as well as small business owners or self-employed individuals.
- Tax Deferred Contributions – All contributions are tax-deductible, and the investment earnings are tax-deferred. Assets are not subject to income tax until they are withdrawn from the Cash Balance Plan or a rollover IRA.
- Higher Contribution Limits – Cash Balance Plans allow for high tax-deductible contributions than a 401(k). The maximum contribution amount is dependent on the individual’s age and normally increases as participants get older.
- Creditor Protection – Plan assets in a Cash Balance Plan are ERISA creditor protected.
- Flexible Plan Design – Cash Balance Plans can easily provide for many different levels of benefits and contributions.
- Supplement to a 401(k) Plan – Cash Balance Plans can be used as a companion to a 401(k) plan, providing a more favorable contribution cost design.
How Can Cash Balance Plans Help Business Owners Take Advantage of the New Tax Law?
“One of the best ways for a business to lower their income is to make contributions into a retirement plan. The advantage of a Cash Balance Plan retirement plan is it benefits the owner and key other people, as opposed to a 401(k) where it’s benefiting everybody,” explained Todd.
The 20 percent pass-through deduction is “phased out” for business owners with taxable income between the threshold limit and phase-out limit. By taking advantage of Cash Balance Plans, businesses can fall within these limitations.
Please contact Todd Yawit with any questions regarding Cash Balance Plans. You can reach him at (513) 573-0129 or send him an email at tyawit@gosaxon.com.
Tax Cut Spurs Employers to Boost 401(k) Contributions
Following one after the other, large employers including Wal-Mart, Aflac and SunTrust have announced significant compensation and benefits changes and attributed them to the Tax Cuts and Jobs Act, which President Donald Trump signed into law in December.
Experts expect hundreds of other employers to join suit.
A new study from global consulting and advisory firm Willis Towers Watson found that about half of 333 large and mid-sized companies polled plan on making changes to their employee benefits, compensation, total rewards and executive pay programs within the next year.
All told, 66% of employers surveyed have either made changes to their benefits packages or are considering making changes. The most common changes are expanding personal finance planning (34%), increasing 401(k) contributions (26%) and increasing or accelerated pension plan contributions (19%), according to WTW.
About 22% of employers say they plan on addressing pay gap issues — a hot topic in the wake of the #MeToo movement and the public firings of top CEOs, editors and TV anchors, politicians and chefs — as part of a broad-based approach to compensation, according to the report.
“The tax reform law is creating economic opportunity to invest in their people programs,” says John Bremen, managing director of human capital and benefits at Willis Towers Watson. “While a significant number have already announced changes to some of their programs, the majority of employers are proceeding to determine which changes will have the highest impact and generate the greatest value.”
Although the Tax Cuts and Jobs Act slashed the corporate tax rate to 21% from 35%, one expert says the decision of where to place those extra savings is going to vary by employer.
“Clearly you have that situation where there has been a tremendous amount of activity,” says Jack Towarnicky, executive director for Plan Sponsor Council of America. “I haven’t seen a comparable situation in the past where somebody announced a particular change and so many others have moved in the same direction. I think it would be as varied as the enterprises themselves where they deploy any corporate reduction.”
Some companies, such as Boeing, Disney and MidWestOne Bank, announced one-time bonuses and student loan repayment contributions, respectively, but said those decisions were not made with consideration to the tax reform.
The heavy lift of raising retirement benefits
Any changes to a company’s employee benefits plan require analysis and strategy to determine the predicted costs, which is more time-consuming than giving every employee a one-time bonus, Towarnicky says.
“There have been a handful of employers that have announced changes in 401(k) savings plans, but it’s clearly dwarfed by the number of employers that announced one-time bonus payments,” he says. “There is a difference between a one-time action and a change to your 401(k) match. It is reasonably predictable if you’ve got a match and you’re going to increase it.”
Employers may also apply those extra savings to voluntary or employer-sponsored benefits, a growing trend for 2018, and wellness initiatives that transcend the benefits package.
Companies with larger, campus-like office buildings are beginning to invest in bike trails around the area and ergonomic work stations, says Catherine O’Neill, senior healthcare consultant at Willis Towers Watson.
Employers are “trying to blend their work environment with their benefits strategy or wellness strategy to make it more successful,” O’Neill says.
While the changes will remain to be seen, Towarnicky warns employers faced with reinvesting their tax savings that those rates may not remain in effect indefinitely.
“Too many times, particularly when it comes to retirement, people develop expectations,” he says. “Any reductions [to benefits or compensation] have a negative impact on employee relations.”
Read more.
Source: Eisenburg A. (28 January 2018). "Tax cut spurs employers to boost 401(k) contributions" [Web Blog Post]. Retrieved from address https://www.benefitnews.com/news/tax-cut-spurs-employers-to-boost-401k-contributions?brief=00000152-14a7-d1cc-a5fa-7cffccf00000
Tax Law Fuels Changes to Benefits and Compensation Programs
What changes will your employee benefits embark on with The Tax Cuts and Jobs Act passed? This article from Employee Benefit Advisor touches on the topic.
The Tax Cuts and Jobs Act is fueling changes to corporate America’s employee benefits, compensation and executive pay programs, according to a survey by Willis Towers Watson.
Of 333 large and midsize employers who responded, 49% are considering making a change to at least one of these programs either this year or next.
“The tax reform law is creating economic opportunity to invest in their people programs,” says John Bremen, managing director of human capital and benefits at Willis Towers Watson. “While a significant number have already announced changes to some of their programs, the majority of employers are proceeding to determine which changes will have the highest impact and generate the greatest value.”
The most common changes organizations have made or are planning or considering include expanding personal financial planning, increasing 401(k) contributions and increasing or accelerating pension plan contributions.
Beth Ashmore, the senior consultant for retirement risk management at Willis Towers Watson, says when it comes to expanding personal financial planning and increasing 401(k) contributions, for an employer, the value of making adjustments in those areas is to ensure employees they are going to be taken care of.
“Whenever any employer is thinking about making a change in total rewards, they need to be thinking about it from the perspective of the compensation as the benefit,” Ashmore says. “What is the best value and impact I can make for my employees?”
As for increasing or accelerating pension plan contributions, Ashmore says with the tax law change the majority of employers have a short-term opportunity to make a pension contribution and potentially deduct at a higher tax rate at the beginning of 2018. “Going forward, that tax deduction will be less for a lot of employers under the new tax law,” Ashmore says.
Other potential changes to benefit programs include increasing the employer healthcare subsidy, reducing or holding flat the employee payroll deduction, or adding a new paid family leave program in accordance with the Family and Medical Leave Act’s tax credit available for paid leave for certain employees.
Compensation plans
At least 64% of employers are planning to or considering taking action on their broad-based compensation programs, or have already taken action. The most common changes organization have made or are planning include conducting a review of their compensation philosophy, addressing pay-gap issues and introducing a profit-sharing or one-time bonus payout to all employees.
Steve Seelig, executive compensation counsel at Willis Towers Watson, says when it comes to changing compensation philosophy employers should re-evaluate their pay structure to determine if they want to continue to offer the same compensation.
“Employers may want to consider a more fixed compensation — similar to what Netflix started — where the CEO is paid much more salary and less performance-based compensation,” Seelig says.
Many employers answered questions on addressing pay gaps from the perspective of closing a gender pay gap. However, Seelig says employers could also refer to pay gaps between levels within an organization, such as an associate to a supervisor.
“The CEO pay ratio will be disclosed later on this year and employers could take this time as an opportunity to narrow the gaps between positions before the disclosure,” Seelig says.
Read more.
Source: Olsen C. (28 January 2018). "New tax law fuels changes to benefits and compensation programs" [Web Blog Post]. Retrieved from address https://www.employeebenefitadviser.com/news/new-tax-law-fuels-changes-to-benefits-and-compensation-programs?brief=00000152-1443-d1cc-a5fa-7cfba3c60000
Tax Bill Provision Designed To Spur Paid Family Leave To Lower-Wage Workers
Tucked into the new tax law is a provision that offers companies a tax credit if they provide paid family and medical leave for lower-wage workers.
Many people support a national strategy for paid parental and family leave, especially for workers who are not in management and are less likely to get that benefit on the job. But consultants, scholars and consumer advocates alike say the new tax credit will encourage few companies to take the plunge.
The tax credit, proposed by Sen. Deb Fischer (R-Neb.), is available to companies that offer at least two weeks of paid family or medical leave annually to workers, but two key criteria must be met. The workers must earn less than $72,000 a year and the leave must cover at least 50 percent of their wages.
If contributing at the half-wage level, a company receives a tax credit equal to 12.5 percent of the amount it pays to the worker. The tax credit will increase on a sliding scale if the company pays more than 50 percent of wages. It could go up to a maximum credit of 25 percent of the amount the employer paid for up to 12 weeks of leave.
Payments to full- and part-time workers taking family leave who’ve been employed for at least a year would be eligible for the employer’s tax break. But the program, which is designed to test whether this approach works well, is set to last just two years, ending after 2019.
Aparna Mathur, a resident scholar in economic policy studies at the American Enterprise Institute, says the new tax credit sidesteps a pitfall for Republicans. They are wary of any legislation mandating that employers provide paid leave. The tax credit also is appropriately aimed at lower-wage workers who are most likely to lack access to paid leave, said Mathur, who co-authored a recent report on paid family leave.
But it’s not a big enticement.
“Providing this benefit is a huge cost for employers,” Mathur said. “It’s unlikely that any new companies will jump on board just because they have a 12.5 to 25 percent offset.”
That view is shared by Vicki Shabo, vice president for workplace policies and strategies at the National Partnership for Women & Families, an advocacy group, who said it will primarily benefit workers at companies already offering paid family leave. The new tax credit “just perpetuates the boss lottery,” she added.
Heather Whaling said her 22-person public relations company probably qualifies for the new tax credit, but she doesn’t think it’s the right approach. Whaling, the president of Geben Communication in Columbus, Ohio, already offers paid leave. The company provides up to 10 weeks of paid leave at full pay for new parents. Four employees have taken leave, and by divvying up their work to other team members and hiring freelancers they’ve been able to get by.
“It is an expense, but if you plan and budget carefully it’s not cost-prohibitive,” she said.
The tax credit isn’t big enough to provide a strong incentive to provide paid leave, said Whaling, 37. Besides, “having access to paid family leave shouldn’t be luck of the draw, it should be available to every employee in the country.”
Still, the tax credit may be appealing to companies that have been considering adding a paid family and medical leave benefit, said Rich Fuerstenberg, a senior partner at benefits consultant Mercer.
By defraying some of the cost, the tax credit could help “tip them over” into offering paid leave, he said. But “I’m not even sure I’d call it the icing on the cake,” Fuerstenberg said. “It’s like the cherry on the icing.”
Only 15 percent of private-sector and state and local government workers had access to paid family and medical leave in 2017, according to the Bureau of Labor Statistics’ National Compensation Survey. Eighty-eight percent had access to unpaid leave, however.
Under the federal Family and Medical Leave Act, employers with 50 or more workers generally must allow eligible employees to take unpaid leave for up to 12 weeks annually for specified reasons. These include the birth or adoption of a child, caring for your own or a family member’s serious health condition, or leave for military caregiving or deployment. An individual’s job is protected during such leaves.
A tax credit that can be claimed at the end of the year is unlikely to encourage small businesses to offer paid family and medical leave, said Erik Rettig, an expert on family leave policies at the Small Business Majority, which advocates for those firms on national policy.
“It isn’t going to help the family business that has to absorb the costs of this employee while they’re gone,” Rettig said.
A better solution, according to Shabo and others, is to provide a paid family leave benefit that’s funded by employer and/or employee payroll contributions. Sen. Kirsten Gillibrand (D-N.Y.) and Rep. Rosa DeLauro (D-Conn.) last year reintroduced such legislation. Their bill would guarantee workers, including those who are self-employed, up to 12 weeks of family and medical leave with as much as two-thirds of their pay.
A handful of mostly Democratic states — including California, New Jersey, Rhode Island and New York — have similar laws in place, and a program in the District of Columbia and Washington state will begin in 2020.
“We know from states that this approach works for both employees and their bosses,” Shabo said.
Read the original article.
Source: Andrews M. (23 January 2018). "Tax Bill Provision Designed To Spur Paid Family Leave To Lower-Wage Workers" [Web blog post]. Retrieved from address https://khn.org/news/tax-bill-provision-designed-to-spur-paid-family-leave-to-lower-wage-workers/
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