Cash Balance Defined Benefit Pension Plan
A “Cash Balance” Plan is a defined benefit plan that communicates its benefits in terms characteristic of a defined contribution plan.
Instead of earning a stated monthly benefit at retirement age, a participant has a hypothetical “account” receiving annual pay credits. Pay credits would be based on a percentage of wages or dollar amount. Pre-defined interest credits are allocated as earnings on these pay credits annually.
At the point of distribution from the plan, participants receive the value of their hypothetical account rather than a stated benefit. The contributions by the employer to the plan are determined actuarially based on the benefits promised in the hypothetical accounts.
Key Plan Highlights and Commitments
Highlights
Allows for large tax deductions and rapid accumulation of assets.
Allows for higher benefits for participants closer to retirement.
Ideal for multiple partner businesses for predictability of cost splits and benefits owed.
Provides more easily understood data on benefits earned for each participant.
Commitments
The plan is generally required to be sponsored for three or more years.
Contributions are required on an annual basis based upon plan actuarial factors.
Benefits are guaranteed, the employer assumes the burden of investment performance.
Plan requires annual certification by an enrolled actuary (included in APC fees).
May require government Pension Benefit Guaranty Corporation (PBGC) premium payments.
Sample Cash Balance Plan Allocation Representation
| Participant | Age | Compensation | Pay Credit | Interest Credit | Hypothetical Balance |
|---|---|---|---|---|---|
| Owner #1 | 58 | $265,000 | $102,000 | $5,100 | $107,100 |
| Owner #2 | 44 | $265,000 | $50,000 | $2,500 | $52,500 |
| Employee #1 | 26 | $38,000 | $2,850 | $143 | $2,993 |
| Employee #2 | 35 | $42,000 | $3,150 | $158 | $3,308 |
| Employee #3 | 33 | $51,000 | $3,825 | $191 | $4,016 |