If you sponsor a cash balance plan, there’s a narrow window right now that most physicians miss and it can cost you significantly in either unexpected contributions or lost tax deductions. That window closes shortly after your AFTAP certification.
- What Just Happened (And Why It Matters)
- The Hidden Risk Most Physicians Don’t See
- Scenario 1: Underfunding (The Obvious Problem)
- Scenario 2: Overfunding (The Silent Problem)
- The Reality
- What Sophisticated Plans Do Differently
- What We See in Real Plans
- Why April 30 Is Critical
- The Right Way to Think About Your Plan
- Take Action Before April 30
- Final Thought
What Just Happened (And Why It Matters)
Once your actuary certifies your funding status under IRC Section 436:
- Your plan is officially classified as underfunded, optimal, or overfunded
- That classification directly controls:
- Contribution requirements
- Ability to take lump sums
- Flexibility to increase benefits
But here’s the problem:
Most plans don’t fail because of poor markets they fail because of poor design.
The Hidden Risk Most Physicians Don’t See
Traditional cash balance plans use fixed interest crediting (FIC).
That creates a structural flaw:
- Your liabilities grow at a fixed rate (typically 4–5%)
- Your assets fluctuate with the market
The result:
You’re almost guaranteed to experience one of two problems:
Scenario 1: Underfunding (The Obvious Problem)
- Markets decline
- Assets drop
- Liabilities keep growing anyway
AFTAP falls below key thresholds:
- <80% → Restrictions begin
- <60% → Accruals can freeze
Outcome:
- Forced contributions
- Reduced flexibility
- Negative funding notices
Scenario 2: Overfunding (The Silent Problem)
- Markets perform well
- Assets grow faster than liabilities
AFTAP rises too high:
- >120% → Contributions limited
- >140% →Contributions often eliminated
Outcome:
- Lost tax deductions
- Trapped capital inside the plan
- Reversions subject to Potential Excise Tax (50%)
- Corporate Income Tax on full amount
- Reduced long-term efficiency
The Reality
- Underfunded = You’re FORCED to put money in
- Overfunded = You’re PREVENTED from putting money in
Either way, the plan stops working the way you intended.
What Sophisticated Plans Do Differently
Modern designs use Market Return Crediting (MRC):
- Liability growth adjusts with actual portfolio performance
- Assets and liabilities stay aligned
The result:
- AFTAP remains stable (typically near 100%)
- Contributions stay predictable
- Tax strategy remains intact
What We See in Real Plans
When we stress test plans side-by-side:
- FIC designs swing from ~75% to 130%+ funding
- MRC designs stay tightly centered near 100%
Same contributions. Same markets.
Completely different outcomes because of design.
Why April 30 Is Critical
After AFTAP certification (March 31), you still have a short planning window before April 30 to:
- Evaluate your funding trajectory
- Identify underfunding or overfunding risk
- Model contribution ranges
- Determine whether your current design is working or quietly failing
After this window, your flexibility becomes significantly more limited.
The Right Way to Think About Your Plan
- The goal is not to be fully funded.
- The goal is to be precisely funded.
That’s where:
- Contributions are controllable
- Tax deferral is maximized
- Surprises are eliminated
Take Action Before April 30
We provide a Cash Balance Funding Risk Review specifically for physicians and their CPAs.
In 15 minutes, we can determine:
- Risk zones (underfunded vs overfunded)
- Whether funding restrictions are likely
- If your contribution flexibility is at risk
- Whether your crediting strategy is structurally aligned
Final Thought
- Most plan administrators react to funding problems after they show up
The best plans are engineered so they never show up in the first place