What is a Cash Balance Plan?

A type of defined benefit plan that looks like a defined contribution plan, such as a 401(k).  Instead of a statement showing their promised benefit in the form of a monthly annuity beginning at a future date, like in a traditional defined benefit plan, participants receive statements defining their promised benefit in the form of a current “account balance”.

How do Cash Balance Plans work?

Participant accounts receive an annual “principal credit” and “interest credit”, each of which are defined by the plan design and funded by contributions from the employer and investment returns achieved by the pooled plan assets.

How are Cash Balance Plan contributions calculated?

The actuary will value the benefits annually (defined by the plan) and compare against the plan assets to determine the contribution requirements.

What are the limiting factors in determining the maximum Principal Credit for a participant?

Each participant’s Ages and Wages are the two biggest factors in determining their maximum allocation.

Are contributions the same each year?

The employer’s required funding will fluctuate annually as the Ages and Wages of their eligible employees change and will also be impacted by the investment results of the pooled plan assets.

Deadline for the employer’s required annual contribution?

The company’s tax filing deadline (including extensions).

Are all employees required to be included?

Some employees may be excluded but, in general, at least 40% of employees who have met the Plan’s eligibility requirements must be included (no fewer than two, if two have met the requirements).

Must a Cash Balance Plan be in place for a required time?

Although Cash Balance plans are to be established with the intent of being permanent, there is no defined period for which a plan must stay active. A plan may terminate at any time so long as there is a legitimate business reason for doing so (i.e., too costly).

Are there tax advantages to an employer for setting up a Cash Balance Plan?

The required funding contributions and fees the employer pays to the Plan’s service providers are eligible for business tax deductions.  Plus, the SECURE Act 2.0 established tax credits for employers who establish their company’s initial qualified retirement plan.

What is the deadline for setting up a Cash Balance Plan?

Also, the company’s tax filing deadline (including extensions).