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Cash Balance Plan

Employers can use a Cash Balance Plan to credit employees’ retirement accounts with a set percentage of their yearly compensation.

Commonly referred to as cash balance pension plan, defined benefit plan and cash balance retirement plan.

Do I Qualify for the Cash Balance Plan?

A cash balance plan is a type of defined benefit plan in which an employer credits a participant’s account with a set percentage of their compensation.

2022 Cash Balance Plan Details

A Cash Balance Pension Plan is a type of defined benefit plan in which an employer credits a participant’s account with a set percentage of their annual compensation, plus interest charges.

How does a Cash Balance Plan work?

These plans qualify for defined benefit treatment because they deliver a stated account balance at retirement. Participating employees are promised a certain amount at the end of their service based on the contribution percentage and a fixed interest rate. The maximum contribution varies by age but is typically much higher than a 401(k) or a profit-sharing plan.

Cash balance pension plans differ from 401(k) plans in four key ways:

• Employees don't contribute to them.
• Employers control where the fund assets are invested and bear all investment risks.
• They're required to offer a “life annuity” distribution option.
• As a defined benefit plan, they typically qualify for federal insurance under the Pension Benefit Guaranty Corporation (PBGC).

Receiving benefits from a Cash Balance Plan

When a participant becomes eligible to receive benefits under the plan, those benefits are typically described in terms of the account balance at the time. Participants can choose an annuity based on that account balance. In some cases, Cash Balance Plans allow participants to take the account balance in a lump sum at retirement. Those who choose the lump sum option usually roll the amount over into an IRA or another employer’s retirement plan or purchase an annuity.

Potential risks for employers

The employer bears the risk of any investment fluctuation that affects plan assets. Because it's a defined benefit plan, a cash balance plan’s funding limits, funding requirements and investment risk track with defined benefit requirements. Failure to properly fund the plan account on a quarterly basis will result in interest and penalties for the employer.

Cash Balance Plan

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• There are potentially greater contribution amounts available than in 401(k) plans.
• The plan isn't subject to the same annual contribution limits as a defined contribution plan.
• The business can retain earnings in excess of the plan’s promised return rate.
• The plan can be offered in addition to other plans, like 401(k)s.


• Record keeping costs may be greater than in a traditional defined benefit plan.
• The business has contribution requirements, even if there is no profit.
• The plan may require pension insurance.
• The plan isn't allowed to discriminate in favor of certain employees.
• Conflicting strategies: SIMPLE IRA for Businesses, SIMPLE 401(k) for Businesses.

Assumptions When Taking the Cash Balance Plan

• The employer makes the maximum contributions allowable.

Conflicting Strategies

• SIMPLE IRA (Business)
• SIMPLE 401(k) (Business)
• Defined Benefit Plan
• Section 412(e)(3) Plan

Requirements to Claim the Cash Balance Plan

• The business sets up a cash balance plan.
• The business has a trustee or investment firm manage the assets.
• The business has prepared an employee census used to determine contribution requirements.

Business Entities That Can Claim the Cash Balance Plan

• Schedule C
• Schedule F
• S Corporation
• C Corporation
• Partnership

The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.

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