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Cash balance plans, also known as cash balance pension plans, are getting renewed interest from accomplished  dentists and dental specialists.  Essentially, they are a way to reduce tax liability and increase retirement savings for dentists, doctors, law partners and wealthy business owners.

What is a cash balance plan?

There are two general types of pension plans — defined benefit plans and defined contribution plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee’s retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account.

A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.

How do cash balance plans work?

In a typical cash balance plan, a participant’s account is credited each year with a “pay credit” (such as 5 percent of compensation from his or her employer) and an “interest credit” (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks are borne solely by the employer.

When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. For example, assume that a participant has an account balance of $100,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity based on that account balance. Such an annuity might be approximately $8500 per year for life. In many cash balance plans, however, the participant could instead choose (with consent from his or her spouse) to take a lump sum benefit equal to the $100,000 account balance.

If a participant receives a lump sum distribution, that distribution generally can be rolled over into an IRA or to another employer’s plan if that plan accepts rollovers.

The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

How do Cash Balance Plans differ from traditional pension plans?

While both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.

How do Cash Balance Plans differ from 401(k) plans?

Cash balance plans are defined benefit plans. In contrast, 401(k) plans are a type of defined contribution plan. There are four major differences between typical cash balance plans and 401(k) plans:

1. Participation – Participation in typical cash balance plans generally does not depend on the workers contributing part of their compensation to the plan; however, participation in a 401(k) plan does depend, in whole or in part, on an employee choosing to make a contribution to the plan.
2. Investment Risks – The investments of cash balance plans are managed by the employer or an investment manager appointed by the employer. The employer bears the risks of the investments. Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. By contrast, 401(k) plans often permit participants to direct their own investments within certain categories. Under 401(k) plans, participants bear the risks and rewards of investment choices.
3. Life Annuities – Unlike 401(k) plans, cash balance plans are required to offer employees the ability to receive their benefits in the form of lifetime annuities.
4. Federal Guarantee – Since they are defined benefit plans, the benefits promised by cash balance plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and to begin to pay pension benefits up to the limits set by law. Defined contribution plans, including 401(k) plans, are not insured by the PBGC.

Is there a federal pension law that governs these plans?

Yes. Federal law, including the Employee Retirement Income Security Act (ERISA), the Age Discrimination in Employment Act (ADEA), and the Internal Revenue Code (IRC), provides certain protections for the employee benefits of participants in private sector pension plans.

If your employer offers a pension plan, the law sets standards for fiduciary responsibility, participation, vesting (the minimum time a participant must generally be employed by the employer to earn a legal right to benefits), benefit accrual and funding. The law also requires plans to give basic information to workers and retirees. The IRC establishes additional tax qualification requirements, including rules aimed at ensuring that proportionate benefits are provided to a sufficiently broad-based employee population.

The Department of Labor, the Equal Employment Opportunity Commission (EEOC), and the IRS/Department of the Treasury have responsibilities in overseeing and enforcing the provisions of the law. Generally, the Department of Labor focuses on the fiduciary responsibilities, employee rights, and reporting and disclosure requirements under the law, while the EEOC concentrates on the portions of the law relating to age discriminatory employment practices. The IRS/Department of the Treasury generally focuses on the standards set by the law for plans to qualify for tax preferences.

How to Learn More

Cash balance plans are one effective tactic to lower your taxes.  They take a commitment and work but are effective when done properly.  They are one tool among many that Dental Accounting Association members use to lower your effective tax rate.

To learn more about your specific situation, contact a Dental Accounting Association member in your area.

Accounts receivable within every dental practice tells a story. And that story varies within each practice depending upon the approach you take. It tells how big of a bank your dental practice has become, especially when you look at the amount of money that is owed to your practice after more than 90 days.

So what is the amount of A/R that the average dental practice has on its book for more than 90 days? How does the average practice’s A/R compare to its gross production? To find this out, we took data from Sikka Software over the last seven years. The data we are using for this comparison has been collected by Sikka Software from more than 12,500 dental practices from around the United States.

Here are the numbers..

Average Dental Practice A/R above 90 days
2011 — $41,111.14
2012 — $48,579.92
2013 — $51,584.39
2014 — $52,571.54
2015 — $49,598.06
2016 — $47,736.21

Average Dental Practice A/R to gross production
2011 – 78.29%
2012 – 85.28%
2013 – 92.98%
2014 – 98.66%
2015 – 101.27%
2016 – 94.79%

Do you know what your A/R is for more than 90 days? Do you know how it compares to your overall gross production? These are key numbers for any dentist to know. After all, they directly affect the health of your practice.

Andy Cleveland, dubbed as the A/R Ninja, is tonight’s keynote speaker on this exact topic at a dental study club locally and has been nice enough to invite us as well.  While Andy’s insights won’t be shared publicly, each Dental Accounting Association will be fully briefed so we can drive down AR.

If you are looking to shrink A/R, there are many tools like SIKKA, TekCollect and the tactics that you deploy within your dental office.

Selecting a Dental CPA

While working with a local generalist CPA is convenient, a general CPA does not have the time, interest or in-depth knowledge of the dental industry to provide tools or guidance on managing Accounts Receivable.  For example, Dental Accounting Association members utilize tools like SIKKA and TekCollect to better manage AR and shrink it proactively.

If you are searching for a higher level of expertise, visit the Dental Accounting Association website to locate a Dental CPA nearby or contact us and we’ll make an introduction for you.

If you are planning to attend the American Dental Association Annual in Atlanta, please stop by and visit us in the exhibit hall at booth #336.

The Dental Accounting Association is a collaborative group of Dental CPA Firms throughout the North America that are focused on providing tax savings, practice benchmarking and profit improvement coaching for dentists.  Our group of Dental CPA’s share leading edge tax strategies in conjunctive with dental practice management tools to provide insights on dental practice profit improvement.

Each member of the Dental Accounting Association provides their services on a fixed fee basis (no hourly billing surprises).  To enhance our capabilities, the Dental Accounting Association also works with dental specialists such as:

• Dental Law Firms
• Dental Practice Real Estate
• Dental Banks
• Dental Insurance
• Dental Practice Profit Improvement Software

Hope to meet you in Atlanta.