A cash balance plan is a qualified employee benefit plan which allows participants to accumulate retirement funds through company contributions and interest credits. A cash balance plan provides for a company contribution either in the form of a flat dollar amount or a percentage of pay and for a guaranteed interest component.
As a plan sponsor, many factors contribute to what type of retirement plan is right for the company. Generally speaking, cash balance pension plans are good fits for the following companies:
- Profitable company with strong cash flows, as an annual contribution is required.
- Companies who have older key employees who want to maximize their contributions to the cash balance pension plan; the older the participant, the higher the contribution.
- Companies who will make a commitment to the funding of the plan and can afford to do so.
Advantages of Cash Balance Plans
- The contribution to the plan is a tax deduction due to the qualified status of the plan. As a result, federal income tax and state income tax will be reduced by the contribution to the plan.
- Earnings accumulate tax-free to the participant, as with other qualified plans.
- When a participant terminates employment, the vested portion of the plan is paid to the employee. Funds are not required to stay in the plan.
- A cash balance feature can be combined with a 401k plan to offer more versatile plan design options.
Disadvantages of Cash Balance Plans
- Contributions to the plan are relatively fixed, which doesn’t allow for as much flexibility to the company.
- Administration costs of the cash balance plan are typically higher than a typical 401k plan.
- Plan documents typically are custom plan documents, which are more costly to maintain.
As outlined, cash balance plans offer many advantages to those companies that are a good fit. Please contact Michelle Buckley at mbuckley@meadenmoore.com if you would like further information on considering a cash balance plan.
Another post by Michelle about benefit plan advising and auditing:
The Department of Labor (DOL) and Target Date Funds (TDF) - How Do You Measure Up?
