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Cash Balance Points

A cash balance plan is a defined benefit plan that defines the promised benefit in terms of a stated account balance or “hypothetical account” instead of a monthly pension payable at specific retirement age.


  • Substantial benefits can be provided and accrued within a short time – even with early retirement

  • Employers can contribute (and deduct) more than under other retirement plans

  • Easier for participants to understand because benefits are expressed in hypothetical account balances

  • Vesting can follow a variety of schedules from immediate to spread out over three years

  • Benefits do not have to be dependent upon asset returns


  • Most expensive form of plan

  • Most administratively complex plan

  • In almost all years, a contribution must be made

  • Employee benefits cannot be retroactively reduced



Who Contributes
Generally, the employer makes the most contributions. Sometimes, employee voluntary contributions may be permitted.
Contribution and Benefit Limits

Benefits provided under the plan are limited.  Generally, the benefit limits are higher than those allowed in Defined Contribution Plans.   An Enrolled Actuary is needed to determine the Contribution and Benefit Limits

Filing Requirements
Annual filing of Form 5500 is required.  An enrolled actuary must sign the Schedule SB of Form 5500.
In-service Withdrawals
Generally, a defined benefit plan may not make in-service distributions to a participant before age 62.
How do cash balance plans differ from 401(k) plans?
Cash balance plans are defined benefit plans. In contrast, 401(k) plans are defined contribution plans. There are four major differences between typical cash balance plans and 401(k) plans:
  1. Participation – Participation in typical cash balance plans generally does not depend on the workers contributing part of their compensation to the plan; however, participation in a 401(k) plan does depend, in whole or in part, on an employee choosing to contribute to the plan.

  2. Investment Risks – The investments of cash balance plans are managed by the employer or an investment manager appointed by the employer. The employer bears the risks of the investments. Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. By contrast, 401(k) plans often permit participants to direct their own investments within certain categories. Under 401(k) plans, participants bear the risks and rewards of investment choices.

  3. Life Annuities – Unlike 401(k) plans, cash balance plans are required to offer employees the ability to receive their benefits in the form of lifetime annuities.

  4. Federal Guarantee – Since cash balance plans are defined benefit plans, the benefits promised by cash balance plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and to begin to pay pension benefits up to the limits set by law. Defined contribution plans, including 401(k) plans, are not insured by the PBGC.

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These documents are for general information and educational purposes only, and must not be considered an investment or financial planning advice. Such advice must be tailored to your individual situation and objectives. Investors should consult all available information, including fund prospectuses, and investment legal and accounting professionals, before making any fund purchase or executing any investment or financial planning strategy. They must exercise their own independent judgment when making any investment decision.

All investments involve risk. There can be no guarantee that the strategies, tactics, and methods discussed here will be successful. Shares may be more or less valuable than purchase price at any time in the future. Any performance-related numbers referenced are not verified and are being used for informational purposes only.

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