Cash Balance Plans Under the New Tax Law

By Bill Barks
Director of Employee Benefit Plan Services

The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017 and generally impacts tax years beginning in 2018. The tax law introduced a new deduction that should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC or sole proprietorship. In general, owners of pass-through entities will receive a 20% deduction of “qualified business income.”

However, taxpayers that are owners of a “specified service trade or business” may be limited in the amount of deduction that can be claimed. A “specified service trade or business” is defined as a trade or business involved in the performance of services in the fields of health (i.e., medical services by physicians, nurses, dentists and other similar healthcare professionals, but not services not directly related to healthcare, such as the operation of spas and health clubs), law, accounting, actuarial science, performing arts (but not services by persons other than performing artists, such as promoters or broadcasters), consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.

Under the new law, taxpayers that are owners of a specified service business are not entitled to the full 20% deduction if their taxable income exceeds certain thresholds. The applicable threshold levels for 2018 are $315,000 (joint filers) or $157,500 (all other filers), and the deduction is phased out for service business owners with taxable income between the threshold levels plus $100,000 for joint filers or $50,000 for all other filers. In other words, owners of service businesses will receive no deduction if their taxable income exceeds $415,000 (joint filers) or $207,500 (all other filers).

If you are in a specified service trade or business, contributions made to a qualified retirement plan can be a powerful tool to reduce your taxable income sufficient to qualify for the 20% deduction. One type of retirement plan in particular, a cash balance plan, offers significantly higher contribution deduction opportunities.

Simply put, a cash balance plan is a cousin of the defined benefit plan with more flexibility. In some respects it looks somewhat like a 401(k) plan that you probably already have. It’s an additional qualified plan which generally sits side-by-side with a profit sharing/401(k) plan. Because a cash balance plan is a type of defined benefit plan, it greatly favors its older and higher compensated participants. This makes it ideal for many professional practices. Cash balance plans have been around for over 20 years and based on IRS data through 2016:

  1. There are over 20,000 cash balance plans in operation.
  2. Plan assets exceed $1 trillion dollars.
  3. Cash balance plans comprise over 35% of all defined benefit plans.
  4. Over 90% of plans are in place in companies with less than 100 employees.
  5. Over 65% of plans are in place for physicians, dentists, attorneys and other professionals.

Depending on your age, a cash balance plan might allow you to put away an additional $250,000 or more each year into a tax deferred, qualified retirement plan. Below is a comparison of defined contribution and defined benefit plans.

A defined contribution plan sets a formula based on compensation to determine the annual contribution for each participant’s account in the plan. Upon termination or retirement, the benefit is whatever value the account has attained. So, the final value is dependent on deposits, time and rate of return. There is no guarantee of any particular benefit.

On the other hand, a defined benefit plan sets a percentage of compensation as a benefit due at retirement, and then works backward to determine annual contributions. The accrued vested benefit of contributions compounding at 3-5% is a guarantee by the plan and the plan sponsors. In the event of a funding shortfall, the plan sponsor must make up the deficiency.

While the cash balance plan is a defined benefit plan, the participant will see an account much like their 401(k) except that their contributions grow at a guaranteed 3-5%, and the participant does not exercise investment control. It’s all done for the participant.

Let’s see how using a cash balance plan could allow any owners of a specified service trade or business to qualify for the full 20% deduction and the impact on their effective tax rates.

The above 61-year-old married physician with a practice earning $650,000 a year could set up a defined benefit plan to get his taxable income under the $315,000 threshold amount. He could put $268,000 in a cash balance plan, in addition to putting money in his 401(k) and contributing to employee retirement accounts, and get down to an effective tax rate of approximately 20%.

In order to address non-discrimination rules, owners are required to allocate some portion of the cash balance plan funding to the other eligible employees. The rules depend on the age and income levels of the employees. Typically setting up a cash balance plan for a business owner will require a profit-sharing retirement contribution for staff to equal to about 7.5 percent of their salaries. As a result of this, cash balance plans can sometimes be too expensive for larger businesses with many low wage earners.

For small, profitable professional businesses, however, the vast majority of the benefit can usually go to owners, not the employees. In the example above, the physician practice employs four people earning between $25,000 and $50,000 a year. To pass nondiscrimination rules, the four employees would split an annual retirement contribution from the doctor of about $14,000. Therefore, the owner gets over 95% of the total allocation of the contribution amount.

Setting up a cash balance plan isn’t the right strategy for every business. Owners must be sure of stable, consistent profits before they commit to funding several years of cash balance plan contributions.

However, in the right situation, cash balance plans have been an effective tax strategy. Now, under the new tax law, they can be an even more powerful tax reduction tool for specified service business owners that operate as a partnership, S-corporation or sole proprietorship.

If you have questions about your company’s employee benefit plan, please contact Bill Barks at (317) 613-7867 or email

To Be Successful, You Must Be Intentional

By Tom Sponsel, CPA/ABV, CFF
Managing Partner

Some leaders seem to simply have a golden touch. But success is no accident. The best leaders don’t stumble into it — they take a specific path. Here’s how you can follow suit.

Don’t be afraid of failure. Learn from it! The best leaders treat failure as a launching pad rather than a roadblock. In other words, fail forward. Figure out what didn’t work, determine what you can do to improve and keep pushing to achieve your goals. Keep in mind that you may need to modify those goals along the way.

Be intentional. Operate in a deliberate manner. Effective leaders come to decisions through careful and extensive analysis. They always ask questions and hold themselves and their team members accountable. They keep track of goals, evaluate progress and sometimes even bring in a third party to oversee the company’s practices with a fresh set of eyes.

Maintain a healthy balance. Great leaders seamlessly juggle personal and professional responsibilities. And they never lose sight of their long-term goals in and outside of the office. They have a specific vision for their work and home lives.

Whatever kind of leader you are — manager, supervisor, CEO, etc. — and whatever sort of business you’re in, this advice applies to you. Hopefully it helps you on your path to success!

If we can assist you further with achieving success in your business or personal affairs, please contact Tom Sponsel at (317) 608-6691 or email

Making Your Staff Better than You

By Lisa Purichia
Partner, Director of Entrepreneurial Services & Employee Benefit Services

A leader is only as strong as the team behind them. With just a few months before the end of the year, now is a good time to evaluate your staff and determine areas in need of improvement. Listed below are some tips to help you get started on the path toward strengthening your team and your company as a whole.

In the long run, taking these steps will enhance your ability to achieve desired results and make you a better leader as well. Most successful leaders surround themselves with a diverse, skilled group that in many cases encompasses individuals who have select skills that are better than the leader’s in certain tasks. But the group’s collective skills ultimately enhance the team’s ability to achieve success!

Listen closely! Ask your staff members about their goals within the company. Where do they hope to see themselves next month or next year? What do they want to improve? Raising these questions will let them know you care, but make sure your actions mirror your narrative and accordingly you will motivate them to be team players.

Invest in your people. Make sure they have all the necessary resources, including tools and training — not just in the beginning, but continuously throughout their time at the company. The current workplace environment mandates that your staff is continually enhancing their skills or learning new ones. Coach your employees and make them hungry to grow and thrive. But also be patient and give them the proper amount of runway and time to blossom. Focus on building upon the individual’s strengths and what they do well — don’t try and fit that square peg in a round hole!

Identify strengths and weaknesses. The most successful businesses have an effective talent management system for finding the BEST candidates to meet the company’s wide variety of needs. If there are competency gaps within your organization, perhaps you need to rethink hiring strategies, provide more training or assign certain tasks to different employees. You should ultimately strive to create an eclectic team. Diversity of thought and expertise breeds success.

If we can assist you with achieving success in your business through staff enhancement, please contact Lisa Purichia at (317) 608-6693 or email

Employee Spotlight: Courtney Morin

Courtney Morin is one of the newest members of the Sponsel team. She joined the firm just last month as a Senior in the Tax Services department. With a bachelor’s degree in accounting from the University of Central Florida and 12 years of public accounting experience, Courtney brings a wealth of knowledge and skills to the table.

As a Senior, Courtney prepares tax returns for individuals, businesses and not-for-profits. She also provides tax compliance and planning services for clients across a broad spectrum of industries.

Outside of the office, Courtney enjoys spending time with her husband and their two little girls — ages 3 and 7 months. She especially loves playing games in the great outdoors.

Is Your Accounting Department Dysfunctional?

By Mike Bedel, CPA, CGMA, MBA
Partner, Director of Audit & Assurance Services

Cash flow is the lifeblood of any business. That’s why the cornerstone of any company is an efficient accounting department and financial reporting system that promptly measures and reports the results of your operations.

Financial statements should be prepared on a regular, systemic basis, around the 15th of the month. Timely, accurate information is essential to your management team. Consistency of practice is crucial.

Is your accounting department meeting these demands? Failure to pay invoices on time or deliver accurate, comprehensive reports can severely harm your company’s reputation and result in late payment fees, decreased credit worthiness, issues with your suppliers, etc. Lack of consistency, planning, transparency and oversight can also quickly lead to untimely financial reporting and poor management information systems. The risk of fraud is also increased in an undisciplined accounting environment.

As a business owner, it’s vital that you determine the people, processes and discipline necessary to make your accounting function run as smoothly as possible. Your management team should be reviewing your financial statements and key performance metrics on a regular, MONTHLY basis! A business that is not doing this on a regular basis is setting itself up for a less than successful result!

If you’re experiencing accounting issues in your company, it’s time to step back and determine the source of the problem. And if you need a fresh set of eyes on your accounting function, Sponsel can help!  Is it your people? Is it your systems, or lack thereof? Or do you simply not know? Whether you’re seeking consultation or thinking about outsourcing your bookkeeping needs, we can offer support.

If we can assist you with achieving success in your business or personal affairs, please contact Mike Bedel at (317) 613-7852 or email

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