Cash Balance Plan Overview
A Cash Balance Plan is a type of qualified retirement plan that is a “hybrid” between a traditional Defined
Contribution Plan and a traditional Defined Benefit Plan. Like traditional retirement plans, Cash Balance Plans
qualify for tax deferral and creditor protection under the federal pension law known as ERISA.
Cash Balance Plans are particularly effective for small business owners who are looking for larger tax deductions
and/or accelerated retirement savings. Employers can combine Cash Balance Plans with 401(k) Profit Sharing
Plans to maximize tax-deductible contributions.
In a Cash Balance Plan, each participant has a theoretical account that resembles those in a 401(k) or profit
sharing plan, but is not actually maintained in individual accounts. The plan maintains one commingled trust
account for all plan participants and hypothetical individual accounts are maintained by the plan’s actuary/third
party administrator, who generates annual participant statements. Each participant’s account grows annually in
two ways:
i) A benefit credit. The benefit credit is a percentage of pay or flat dollar amount that is specified in the
plan document. The credit is often class-based (e.g., higher dollar or percentage amount to
owners/partners or other targeted groups; lower dollar or percentage amounts to staff).
ii) An interest credit. The interest credit is a guaranteed rate of return specified in the plan document, and
is typically tied to federal long-term rates or set at a fixed rate between 4% to 5%. The interest credit is
not dependent on the plan’s actual investment performance, but the plan’s investment portfolio should
be structured to attempt to perform in-line with the anticipated crediting rate.
When participants terminate employment, they are eligible to receive the vested portion of their theoretical
account balance.
Cash Balance Plan Benefits
What types of companies or business owners benefit from a Cash Balance Plan?
▪ Business owners or partners who want to contribute & deduct more than $57,000 per year in retirement
savings. Many highly-compensated individuals are finding that contributions made to their 401(k) and profit
sharing accounts have reached the maximum allowable amounts (currently $57,000, or $63,500 if age 50 or
older). Maximum annual contributions to a Cash Balance Plan are significantly greater than what is
allowable through a Defined Contribution Plan. With a Cash Balance Plan, tax deductible contributions of
an additional $50,000 - $250,000 per year may be obtained depending on the age and income levels of plan
participants. Cash Balance Plans are generally designed using a Class-based benefit formula, which allows
different benefit credits for different classes of employees. This means that owners/shareholders can often
receive higher benefits than other classes, similar to the differences permitted in Class-based profit sharing
plans. These types of plans are subject to what is known as “general testing” under IRS rules.
▪ Business owners or partners who want to “catch-up” on retirement savings. Cash Balance Plans provide a
means to catch-up on retirement savings, particularly for individuals over age 40. Maximum annual
contributions to a Cash Balance plan are age-dependent, so the older the participant, the faster they can
accelerate their savings. This is because older participants have fewer years to save toward the approximate
$2.9 million lump-sum that may be allowed to accumulate in a Cash Balance Plan.