Will a Cash Balance Plan Work for You?

What is a Cash Balance Pension Plan?

  • A type of defined benefit pension that operates in ways similar to a profit sharing plan

          - Clearly shows the amount of contribution being credited to each participant.

          - Clearly shows the value of each participant's account.

How does a Cash Balance Plan work? 

  • Each participant has an individual account similar to a 401(k).  The account grows 2 ways:  

  • (Review Examples Here)

  •             1)  Company contribution is determined by a formula specified in the plan document.

                                - Percentage can be a percentage of pay OR a flat dollar amount

                        2)  Account grows with an annual interest credit.

                                 - The Rate of Return is guaranteed & is not dependent on the investment performance.

                                 - The ROR could change each year or could be fixed. (e.g. linked to 10 year Treasury rate...)

    • At termination, the participant is eligible to receive vested portion of account balance.
    • A participant's vested percentage is determined by the plan's vesting schedule.

    Plan investment and contributions

    • Individual participants are not able to direct the investments in their account.
    • Plan assets are pooled and invested by the trustee or investment manager.
    • Accounts will be credited at a guaranteed rate of return regardless of actual returns.
    • If investment earnings exceed annual interest credit, the excess is used to reduce ER contribution.

                   -  This circumstance does not affect the amount credited to the participant's account.

    • Accounts will increase according to the Plan's schedule and is partly funded by:

                   -  Reduced employer contributions

                   -  Excess in investment earnings


    Can a Cash Balance Plan be offered in addition to 401(k) or Profit Sharing plans?

    • Yes.  An employer can offer retirement plans in combination to produce the desired effect.

    Distribution options

    •   Vested accounts in a Cash Balance Plan can be paid at retirement or termination as follows:

                   -  Lump-sum distribution, OR

                   -  Rolled to an IRA

    •   An annuity form could also be elected where participant receives a set monthly pension.


    Can Cash Balance contributions change?  Increase or decrease?

    • Yes, but with restrictions:

                   -  Contributions cannot vary from year-to-year depending on profitability.

                   -  At establishment employer commits to funding the plan benefit for the foreseeable future.

    • Plan can be amended periodically to permit different contribution levels, with restrictions:

                   -  Any reduction must be made BEFORE an employee works 1,000 hours in plan year.

                   -  The plan can also be frozen or terminated.


    Must everyone participate equally in the Cash Balance Plan?

    • No.  Within government limits employers can designate different contribution amounts.

    Tax deductions and allocations of plan contributions for partnerships

    • Tax deductions for contributions made on behalf of non-partner employees are taken on the partnership tax return.
    • Tax deductions for contributions made on behalf of partners flow through the partnership return to their personal return.
    • Note:  To be sure that the amount deducted for tax purposes by a partner as shown on Schedule K-1 is the same as the amount contributed on behalf of the partner, the partnership's agreement must permit this method of allocation.

    Is the plan subject to IRS discrimination testing?

    • Yes.  Like any other qualified plan, it is subject to discrimination testing.
    • The exact percentage required for staff (NHCEs) employees depends on the results of discrimination testing.

    How do design and administrative costs differ with 401(k) profit sharing plans?

    • Calculations must be certified annually by an actuary.
    • Expenses will vary by size of plan and annual testing requirements.

    What makes a good candidate for a Cash Balance Plan?

    • Good candidates have one or all of the following characteristics:

                   -  Owners or partners who desire to contribute significantly more than $56,000  per year.

                   -  Companies that have demonstrated consistent profit patterns.

                   -  Companies already contributing 3-4% or more to employees, or are willing to  do so.

                   -  Owners or partners over age 40 who desire to "catch-up" on pension savings.


    Advantages of Cash Balance Pension Plans

    • Much higher contribution amounts for pre-tax dollars are permitted.
    • Acceleration of retirement savings.
    • Combines well with 401(k) and/or Profit Sharing for contribution flexibility & higher amounts.
    • Portable in the event of job change or termination.
    • Assets are protected from creditors in the event of bankruptcy.
    • More flexible than traditional Defined Benefit plans.
    • Many distribution options upon retirement: lump-sum payout or IRA rollover.


    • Plans must be "executed" by the last day of the year to be effective for that particular year.
    • Plans do not have to be "funded" for 8-1/2 months following the end of the plan year. (e.g., 09/15/19 for a 12/31/20 year end)