The Kaiser Northwest Permanente Medical Group’s Cash Balance Plan

Summary

• At Kaiser Permanente Medical Group, an eligible physician will have 10% of their gross salary matched by their employer into a cash balance plan every year.
• This money will grow at 4% every year, regardless of how the economy performs.
• Upon retirement or leaving the medical group, you can annuitize the money into regular monthly payments or you can roll it over into an IRA and invest it any way you like. 
• You need to vest into the CBP which takes 3 years at NW Permanente. 

I got asked by a few colleagues to explain the Kaiser Permanente Cash Balance Plan as it relates to Kaiser Physicians working in the Kaiser Northwest medical group. I wrote a little about cash balance plans in this previous post but let’s talk about the NWP’s CBP in more detail.

A quick primer before getting into this topic: distinguishing The Permanente Medical Group from the Kaiser Health Plan. The name comes from 2 different groups coming together to form Kaiser Permanente. 

Kaiser is the health plan and doesn’t involve physicians and is in charge of all the budgets to run the entire Kaiser Permanente system. They give an annual operating budget to the Permanente Medical Group and they extend any money necessary to expand buildings and operations. Yea, it’s a fuckfest of a system but it works – my paychecks of my working days prove it.

The health plan (Kaiser) is a non-profit organization, hence the website is (kp.org), while the Permanente Physician Group (NWP) is a for-profit group and their website is (nwp.kpphysiciancareers.com). This dual existence allows for efficient tax planning for this multi-billion dollar healthcare organization.

Physician Cash Balance Plan Background

Up until 2015, Northwest Kaiser Permanente offered their physician employees a traditional pension plan – the ones our grandparents used to get. Those pension plans reproduced a percentage of your salary starting at your traditional retirement age until you died.

(Nerd alert) Cash balance plans are considered pension plans even though they are more like defined contribution plans. Your 401k is a defined contribution plan – whatever you contribute to it is what you can get out of it at a later time plus however much that contribution grows/shrinks in investments.

A cash balance plan is cheaper to setup and run and is less likely to bankrupt a medical group. You see, a pension plan guarantees you a percentage of your income upon your traditional retirement age until you die. So, if you earned $300,000 a year for 25-30 years and retired at age 65, you would likely get 50% of your gross income paid to you from your medical group starting at age 65 for however long you ended up living – that’s quite a lot of money.

I won’t get into it much more other than stating that traditional pension plans are really wonderful benefits but they are really expensive and likely not sustainable with the way pension regulation is changing in the economy.

Cash balance plans are still wonderful retirement tools but it’s important to understand them and the many options that they offer you – most of which aren’t explained to you nor fully understood by your HR department.

How Does A CBP Accrue?

A Cash Balance Plan (CBP) represents a percentage of your salary which the employer sets aside on your behalf into an ‘account’ – it’s referred to as the “pay credit”. It’s not a physical or digital account, actually. It’s money which is promised to you by the time you retire. You see, there is no law that requires your employer to keep that money dollar-for-dollar in an account.

I worked for Northwest Permanente, P.C. (NWP) from 2015 until 2017 and earned a little over $200,000 per year. 10% of my salary was set aside into a CBP every year. When my paycheck would get posted, there would be no accounting of the 10% contribution because as I mentioned, it’s not a physical sum that’s deposited anywhere.

I know I lost some of you above, so just continue reading below, it’ll make sense. In trying to be uber accurate things can get confusing, but it’s important to understand the details of the financial industry, after all, that’s what this blog is all about.

The amount that’s promised to you is an exact amount and you can keep tabs on it yourself, or, as you will see below, there is a website which will allow you to know exactly how much is set aside for you.

When you get first employed by NWP, you will be told that the 10% is based on your base salary only and not any overtime, extra work or admin work. That’s incorrect. You will earn a higher amount based on the extra pay you get, which is fantastic. However, there is a cap on how much of your income will count towards the CBP – more about that below.

How Does The NWP CBP Grow?

There is a “pay credit” and an “interest credit”. The pay credit is what NWP will contribute into the CBP based on your gross income. So, if you are earning $250k then you would have 10% set aside every year, or around $25,000.

In the first year, this won’t grow in any manner. However, starting in your 2nd year, the money you accumulated in the 1st year would earn an interest credit of 4%. NWP is currently offering 4% and I don’t expect this to change in the future.

Your CBP follows a compounding interest concept. If you have $25k in that account and never add another dime then it will grow at 4% every year until you decide to cash it out.

However, if you continue working for KP and continue receiving the CBP pay credit then you would have somewhere around $2,000 deposited into it every month. Then after 30 years, you would have ~$1,430,000 in that account.

Below is a screen shot of my current accrued benefits. I have since retired from KP at the deliciously young age of 39 – so this money will either have to sit around and grow at 4% or I’ll cash it out to spend on hookers and blow.

Qualifying For And Vesting In Your CBP

In order to vest in your cash balance plan, you need to have worked at least 1,000 hours for 3 years with Kaiser Permanente as a physician. If you are fired for fondling a patient or showing up stoned and drunk to work then you are entitled to 0% of that money.

Once you have worked for at least 3 years, you are 100% vested. It’s that simple. Again, you can always refer to the detailed Summary Plan Description which I have attached as a PDF link at the end of this post.

Keeping Tabs On Your CBP

Your account is being managed by a 3rd party pension administrator, in this case it’s Milliman Inc. I included their name just in case you’re a major nerd and want to know who your pension administrator is, but that’s irrelevant since you will be doing all communication through Kaiser’s Director of Pension Plans. I won’t mention her name on this public forum (she is awesome!) but if you click on the “contact us” link in your cash balance plan account then you will have access to her.

So, where can you view your account balance? This website link takes you to your login page. Your HR department will reach out to you and tell you how to register for your account. You can choose your own unique username and password to keep tabs on your cash balance plan.

For nerds such as myself, I log in at least once a year to obtain the newest value and add it to my own net worth calculations. Though I realize that this is a retirement account, I have no problem paying the 10% penalty to gain access to the money if I believe that I can do something more worthwhile with it. As of now, my financial adviser has advised me to keep it there as one of my fixed-income investments and I agree.

When You Separate From Kaiser Permanente

The interest credit continues to accrue even after you separate from the medical group. This is quite important – a guaranteed 4% rate of return is a powerful investment to have.

Though you have the option of taking the money and rolling it over into your personal IRA, it would be wise to review your portfolio, your expected returns and your asset allocation before making that decision.

This should be considered a fixed income retirement account, similar to a CD or a high-interest savings account. However, as of this writing in 2017, there is no such high-interest investment vehicle available.

Upon separation, you will continue to have access to your CBP account so that you can monitor the value of the account.

Penalties And Taxes For Cashing It Out

As with any retirement account, if you cash the money out then you must pay penalties if you are <60 years of age. The cash balance plan is supposed to allow you to have an income after you reach age 59.5, often this is accomplished by annuitizing the lump sum.

You may come across terminology such as “early withdrawal penalty”. This refers to cashing out any portion of the CBP before you reach the IRS mandated qualified age. In practice, you would be hit with a 10% penalty for granting yourself access to your money before having reached that age.

If you have $500k in your CBP and decide to cash it out then you will pay the IRS a penalty fee of $50,000, leaving you with $450,000 in that account. Since you have chosen to cash this money out, you will also need to pay income taxes on it as I’ll explain below.

On top of the 10% penalty, you would owe income taxes on the money you withdraw. Recall that money was put into your CBP with pre-tax money, money which you haven’t paid taxes on. And though in our laymen’s vernacular we like to use the term ‘tax-free’, there is no such thing. Taxes are simply deferred.

You defer paying taxes on a portion of your income by putting it in a CBP, but will need to pay those taxes once you withdraw it. How much tax will you owe? That depends on how much income you have for that year. If you’re retired and you cash out $100k from your CBP then you have realized a $100k income that year – you pay income taxes to Federal and State accordingly.

Contributions Limit

Some of you big-ballers who are earning $700k at Kaiser Permanente are thinking “Sweet! $70k into my CBP every year!” Not so fast. There is a limit to how much of your income can be counted towards your CBP. You can look up the exact amount every year, it’s somewhere around $260,000 and goes up with increased cost of living.

10% of $260,000 is $26,000, the maximum amount KP will set aside for you into your CBP.

What’s This Annuity Thing?

The term annuity confuses a lot of people when it comes to Cash Balance Plans. You can annuitize any sum of money. The basic concept is that you take a lump sum of money and hand it over to a large insurance group and they, in turn, pay you a regular monthly/annual amount out of that.

Why does something like this exist? Why is it given to an insurance group? No idea… just some shady backdoor dealings that happened way before our time. The point is, that you can annuitize any sum of money, including your CBP balance.

Once you reach the IRS mandated retirement age of 59.5, you can either take the lump sum of however much you have in your CBP and roll it over into you own IRA or you can annuitize it.

The terms of the annuity are up to you and the insurance group that you will deal with. I won’t get into annuities too much here because there are all sorts of annuities, though, SPIA’s are often the most favored.

Click below on the screenshot of the PDF document in order to access the detailed description of the plan. 

Feel free to leave any comments you have in the comment section below or contact me using the form below.

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