Cash Balance Plans

To learn more, view the podcast below with our Actuary, Dave Yackel, “Using a Cash Balance Plan to Save Large Pre-Tax Dollars”:

Podcast – Using a Cash Balance Plan to Save Large Pre-Tax Dollars

What is a Cash Balance Plan (Hybrid Plan)?

A Cash Balance Plan is a type of Defined Benefit Plan. Many people are familiar with the mechanics of determining a participant’s benefit and contributions under a Defined Contribution Plan, such as a 401(k) or Profit Sharing Plan. However, determining benefits and contributions for a Defined Benefit Pension Plan is generally more complex and less intuitive. A Cash Balance Plan, however, defines the retirement benefit in terms of a hypothetical account balance or a single sum amount, resembling the type of benefit offered by a defined contribution plan. Contributions and interest at a pre-determined rate (stated in the plan document) are credited each year to this hypothetical account balance.

Features of a Cash Balance Plan include:

  • Higher contributions. Higher contributions may be obtained by using either a stand-alone Plan, or in combination with a Profit Sharing or 401(k) Plan.
  • Annual contributions are generally required.
  • Since the hypothetical account balance is computed using a pre-determined interest rate, if the Plan’s investment gain is greater than this rate, required contributions would be reduced. Conversely, if the gains are less than this rate, greater contributions would be required.
  • Benefits may be insured by and an annual premium paid to the Pension Benefit Guaranty Corporation (PBGC), a quasi United States government agency. A Plan that only covers an owner or only an owner and his spouse, or a plan of a professional employer with less than 26 participants, is not subject to PBGC coverage.

Pension Review Services custom-designs cash balance plans in order to meet the objectives of the client. Design features include:

  • Formula to determine the contribution to the hypothetical account
  • Interest rate to be credited to the hypothetical account
  • Eligibility requirements
  • Vesting schedules

Read about some specific design opportunities for cash balance plans in our Case Studies section: “Owners do not have the same objectives…but all can be met!” and “Lower taxes while saving for retirement…”.

Also see our newsletter, “Have You Heard About the New Hybrids?”.