Cash Balance Plans

What is a Cash Balance Plan?


It is a "hybrid" plan in that it is fundamentally a Defined Benefit (DB) Plan, but it expresses benefits in the form of a guaranteed account, rather than a guaranteed benefit at retirement. It has the following features:

  • The maximum benefit that can be paid follows the normal rules for Defined Benefit Plans.
  • The plan provides for a fixed annual credit, and a fixed annual interest credit on the account.  For example, a plan might say that the annual credit for shareholders is $100,000, and the annual interest credit is 5%
  • Participants receive easily understandable statements showing the value of their account.
  • The actual required contribution differs from the fixed credit because of differences in the actual investment rates and the fixed crediting rates.


Advantages of Cash Balance Plans?


  • Career average benefit pattern - avoids the heavy weighting of benefits to final years of work.
  • Employees have a much better understanding of their benefits.
  • It allows a direct tracking of contributions to ultimate benefits.
  • Age neutral contributions for employees.
  • A CB plan can be designed to fund a buy-out for partners.
  • Almost all new DB plans set up will be Cash Balance Plans - there is nothing a traditional DB plan offers that is not delivered in a better way by a Cash Balance plan.


How Much Can I Deduct?