Small Business Employers are Freezing Cash Balance Plans

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.