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Reduce your business’s pension obligations this year

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in Small Business Tax

Are sky-high pension-plan contributions draining your company’s cash reserves? You may not be able to keep the plan afloat much longer, but you also don’t want to pull the plug.

Good news: The Pension Protection Act of 2006 (PPA) has thrown you a lifeline.

Strategy: Consider switching to a cash-balance plan. This “hybrid” plan is a defined-benefit plan that has some of the characteristics of a defined-contribution plan. Employees still are entitled to receive relatively generous benefits, but the amounts for future payouts are reduced.

Why haven’t cash-balance plans caught on before? They don’t reward longevity, as a traditional pension plan does, so they’re not as favorable to long-term employees. That has led to charges that such plans are age-biased.

PPA insulates employers from age-bias claims when they convert to a cash-balance plan.

How it works

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