In part one of this two-part series, our Birmingham contractor attorneys, introduced how a cash balance buyout can be utilized to establish a mutually beneficial transaction to transfer shares between a retiring owner and an interested partner. Now, we will explain how this process works in detail.
How Does a Cash Balance Buyout Work?
Although there are many approaches to cash balance buyouts, a typical case would be initiated by calculating an annual “service credit” for every year that you have worked as an owner. Once this value is calculated, you can establish an “opening balance” to illustrate the presumed value of those shares. If you are planning to retire in the future, you would then extend the annual service credit for the number of additional years you plan to work. After you combine these two values to determine the total amount of money that must be contributed over your remaining working years, you will divide the total sum by the number of years you plan to keep working. The resulting value is your annual tax-deductible contribution.
The Right Move at the Right Time
It’s important to utilize a cash balance buyout when your business is pulling in significant profits to help you afford these tax-deductible contributions. Since turnover in the construction industry is relatively fluid, it follows that not many people, especially young workers, will have accumulated a significant opening balance. Therefore, the lump sum funded for them is reduced. Plus, younger workers receive a lower service credit which helps increase the owner’s take. Fortunately, the employee(s) benefit because they have their own unique accounts to accrue their own benefits and ensure that they are being adequately funded.
Bolster Your 401(k)
The cash balance buyout can be utilized as an overlay to your existing 401(k) plan to increase contribution levels and help you solidify your retirement goals. The contributions you will make to your employees, which are only required for the lowest-paid half of the non-owner employees, are practically a bargain when you consider what you would have paid in taxes. If this tool is being used to fund a buyout of a senior partner, the younger partners can view the retirement plan contributions as payments for their ownership interest.
Cash balance buyouts have an edge over the traditional pension plan and allow all parties to benefit. You will still have the option of a lifetime annuity, but each covered employee will also have their own account and specified lump sum.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.