A single owner of a small manufacturing company has 6 employees that earn $30,000 annually each. The owner would like to deduct as much as possible while providing no more than 10% of pay to employees.
The example below shows that it will cost the owner roughly $18,000 (i.e. 10% of employee pay) in contributions on behalf of employees to be able to deduct over $200,000 in owner pay.
Assuming a marginal federal tax rate of 39.6%, the owner’s taxes on $186,500 of company-provided funds are reduced by over $73,000. This far exceeds the $18,000 required to be paid to employees under this design.
Note: The owner cost to attain a desired contribution level is highly dependent on the pay and age of each owner and employee. Actual contributions to the cash balance plan may vary from amounts shown due to required actuarial funding assumptions.