Cash Balance Plans
A cash balance plan is a “hybrid” retirement plan that has features of both a traditional defined benefit plan and a defined contribution plan. When you establish a cash balance plan, the employer promises participating employees a contribution credit and an interest credit to their “account” each year. These are often referred to as hypothetical accounts because they do not reflect actual contributions, but reflect a promised lump sum when the employee retires.
The cash balance plan looks like a defined contribution plan, with one exception – the interest credit. This is what makes it a defined benefit plan. Where a defined contribution plan credits an actual rate of investment return, the cash balance interest credit is guaranteed. Usually, it is based on an index, or tied to a bond rate.
Often, companies opt for a Cash Balance and 401(k) to meet their needs. These Combination Plans offer some attractive features.
Is a Cash Balance Plan Right for You? Typically a cash balance plan will benefit you if you meet the following criteria:
• Owner/key employee is aged 45 or older
• You want to maximize tax-deductible contributions to a qualified plan