Before the outbreak of the coronavirus pandemic, small
business were increasingly adopting cash balance plans.
Now, many are frozen or paused, say industry experts. At
Kravitz Financial, about a quarter of the company’s small business clients
froze their cash balance plans, and of that number, 10% had started terminating
them.
“During this climate, most will freeze the plan which
reduces the funding requirements,” says Daniel Kravitz, president. “When the
economy picks up, oftentimes they’ll unfreeze.”
Cash balance plans are celebrated by many across the
industry as highly effective retirement plans for both employer and employee.
Aside from its high contribution limits and tax-deferment potential, when
employees receive their monthly reports, benefits are explained in the form of
a lump sum account balance, making it easier for the participants to
understand.
“More employers are finding transparency important,” says
Alex Kuhel, a Chicago-based partner at October Three.
Adam Bergman, founder of IRA Financial, explains how many of
his clients paused their cash balance plans out of concern that there would be
insufficient cash to make required contributions. Bergman notes that because
most employees hadn’t yet worked 1,000 hours during 2020 when their plans were
frozen—as most froze in March or shortly after—employers had greater
flexibility to enact a freeze. In many cases with defined benefit (DB) plans,
participants won’t accrue their benefit until they work 1,000 hours. Because of
this, employers may freeze their plans, if needed, before the benefit is
ensured.
Bergman says it is important to point out that the window
for freezing cash balance plans has pretty much closed, because by this point
in the year employees have likely exceeded 1,000 working hours.
“Since its August now, the 1,000 hours requirement has
probably been surpassed by a lot of business owners, so that may not be an
option,” he says. “Hopefully, their business is rebounding, and they’ll have
the cash they need to make contributions.”
Funding requirements during the current economic environment
have been altered slightly thanks to the Coronavirus Aid, Relief and Economic
Security (CARES) Act, says Kuhel. Normally, if an employer is following a
calendar tax year, they can adopt and fund a DB or cash balance plan by
September 15, 2021, in order to receive a 2020 deduction. Under the Coronavirus
Aid, Relief and Economic Security (CARES) Act, the 2020 deadlines have been
extended to January 1, 2021. Additionally, employers will have until January 1,
2021, to complete any minimum required contributions originally due in 2020.
Small business employers who received a Paycheck Protection
Program (PPP) loan may have been able to use these funds for their cash balance
plan. The Department of Treasury issued guidance listing the repayment of
retirement benefits as an area to allocate loan funds to. However, Kuhel
recommends checking in with a benefits attorney prior to doing so.
“It is listed under payroll in the treasury guidance, but we
would always encourage an employer to seek counsel to just be safer,” he adds.
Kravitz adds that employers can use the loan to fund
required contributions for employees, but not larger contributions that fund
the business owner’s benefit. Yet, both he and Bergman reference little
utilization of PPP funds due to restricted time periods and little guidance on
PPP usage specifically for cash balance plans.
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