Cash Balance Plans
Cash Balance plans are hybrid plans that combine the characteristics of a defined contribution plan and a defined benefit plan. An employer provides a retirement benefit, stated as a lump sum, which resembles a profit sharing contribution to participants. However a cash balance plan also provides guaranteed benefits and a plan formula like a defined benefit plan.
Some Advantages of Cash Balance plans…
Cash balance plans are used by employers in two ways. First, employers who currently offer a defined benefit plan may want to convert to a cash balance plan. The advantages over a traditional defined benefit plan are:
- Participants understand and appreciate a cash balance plan since they see their lump sum benefit grow each year with contributions and interest
- Employers’ contribution requirements are much more predictable and stable
Second, employers who only have a defined contribution plan and want to contribute more than the allowable annual defined contribution limit can do so with a cash balance plan. When a cash balance plan is paired with a 401(k) profit sharing plan, it is possible to offer much higher benefits to key employees with only a minimal benefit required for other participants. Advantages in this plan design are:
- Owners who earn high wages and want to contribute higher amounts to their qualified retirement plan can do so
- Key employees may be the only participants to receive a benefit in the cash balance plan
- Cash balance plan participants receive the benefit of a guaranteed contribution and earnings annually unlike a profit sharing plan
Some Disadvantages of Cash Balance Plans…
- Employers who consider utilizing a cash balance plan must realize that the retirement benefits (both contributions and earnings) are solely the responsibility of the employer. Having an appropriate investment strategy for the cash balance assets can minimize this liability.
- Accounting for defined benefit plans is more complex thus increasing the administrative costs of the plan.
Let McCready and Keene handle your Cash Balance plan
We can help determine if a cash balance plan is right for you. Please contact us today!