Cash Balance Plans

A cash balance plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest credits.

Accelerate retirement savings for Owners and Key employees while the company experiences large tax deductions.

Cash Balance Plans 

A cash balance plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest credits. 

Easy to understand, straight forward hypothetical account balance is established for each participant as follows: Beginning Balance + Contribution Credits (usually defined as a % of pay) + Interest Credits (defined in plan document, guaranteed interest) = Ending Balance.

Advantages of a Cash Balance Plan:

  • Large tax deductions
  • For the company, money contributed to the plan is tax deductible now.
  • For participants, taxation on benefits is deferred until received as income.
  • Accelerated retirement savings for Owners and Key employees
  • Can vary contribution by owner or Key employee.
  • Employer’s liability is easily defined

Related to: Third Party Administrator, TPA, Retirement Plan Consultant, Employer Retirement Plan Consulting, Actuarial Consulting, Pension Consultant, Actuarial Services

Cash Balance Plans FAQs

How does a Cash Balance Plan work?

Each participant has an account which grows annually in two ways: first, a contribution and second, an interest credit, which is guaranteed rather than dependent on the plan’s investment performance.


Can Cash Balance plans be offered in addition to 401(k) Profit Sharing plans or other plans?

Yes, the employer can offer a combination of qualified retirement plans in order to produce a larger contribution.


What are the distribution options upon retirement or if leaving the employer?

Any vested account in a Cash Balance Plan can be paid as a lump-sum distribution or annuity. Lump sums are usually rolled over to an IRA.


Can Cash Balance contributions change?

Yes, but with restrictions. Cash Balance plans can be amended periodically to permit different contribution levels. Any changes must be made before any employee works 1,000 hours during a plan year. In addition, a plan can also be frozen or terminated.


Must everyone participate equally in the Cash Balance plan?

No. Each participant can have a different amount contributed for them.


Is the plan subject to IRS nondiscrimination testing?

Yes, like any other qualified plan, a Cash Balance Plan is subject to nondiscrimination testing. Employers can anticipate contributions in the range of 5% to 7.5% of pay for staff. The exact percentage required for employees depends on the results of nondiscrimination testing.


How do design and administrative costs compare with 401(k) Profit Sharing plans?

They are higher than a 401(k) plan because the plan is maintained by an actuary who needs to certify each year that the plan is in compliance with the Internal Revenue Code.

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