Cash Balance Plans

What is a Cash Balance Plan?

             A cash balance plan is a qualified employer-sponsored retirement plan that has become increasingly common as an alternative to, or replacement for, a traditional defined benefit pension plan. Although it is technically a type of defined benefit plan, a cash balance plan is often described as a hybrid plan because it combines certain features of both defined benefit and defined contribution plans. Like traditional defined benefit plans, cash balance plans are designed to provide a specified retirement benefit. However, similar to defined contribution plans, participants have individual hypothetical account balances that can be used to track the accumulation of benefits over time.

How Does a Cash Balance Plan Work?

             Each participant in a cash balance plan has a hypothetical account balance established for recordkeeping purposes. These hypothetical accounts allow participants to track the value of their accrued benefit over time. However, unlike a defined contribution plan, employer contributions are not allocated to separate participant accounts. Instead, contributions are made to the plan as a whole, and plan assets are generally held in a single trust for the benefit of all participants.

              With a cash balance plan, the employer makes contributions to the plan on a regular basis. Participants are typically credited with a pay credit, which is often expressed as a percentage of compensation or a flat dollar amount defined by the plan. In addition, participants receive an interest credit based on a rate specified in the plan document. Under applicable regulations, the interest crediting rate generally cannot exceed a permitted market rate of return.

               The amount the employer contributes to the plan each year is determined by the plan's actuary and is based on a variety of factors, including the benefits promised by the plan, participant demographics, and actuarial assumptions. Factors considered may include:

• Benefits promised by the plan
• Ages, compensation levels, and anticipated retirement dates of participants
• The interest crediting rate specified under the plan
• Assumptions regarding future compensation increases
• Assumptions regarding employee turnover, disability, mortality, and other actuarial factors

Are Cash Balance Plans Subject to ERISA?

          Yes, cash balance plans are generally subject to the Employee Retirement Income Security Act of 1974 (ERISA) when sponsored by private-sector employers. As qualified employer-sponsored retirement plans, cash balance plans are subject to various regulatory requirements designed to protect plan participants and beneficiaries. These requirements may include:

• Minimum funding requirements
• Fiduciary responsibilities
• Reporting and disclosure requirements
• Nondiscrimination and other compliance testing requirements

Can a Cash Balance Plan be Rolled Over to Another Account?

              A significant benefit of a cash balance plan is that vested benefits are generally portable. Depending on the distribution options available under the plan and applicable tax rules, a participant who terminates employment before retirement may be eligible to roll over an eligible distribution to another employer-sponsored retirement plan or an IRA. When completed properly, a direct rollover generally does not result in current income taxation because the assets move between eligible retirement accounts. Consolidating retirement assets may offer administrative convenience and can simplify retirement planning for some individuals.

Retirement Wealth Partners can assist you in evaluating your available options, including whether a receiving retirement account is eligible to accept a rollover, and discuss important factors such as fees, investment options, distribution provisions, creditor protections, and tax considerations before a decision is made.

If you are considering rolling over money from an employer-sponsored plan, you often have the following options: leave the money in the current employer-sponsored plan, move it into a new employer sponsored plan, roll it over to an IRA, or cash out the account value. Leaving money in a plan may provide special benefits including access to lower-cost investment options; educational services; potential for penalty-free withdrawals; protection from creditors and legal judgments; and the ability to postpone required minimum distributions. If your plan account holds appreciated employer stock, there may be negative tax implications of transferring the stock to an IRA. Whether to roll over your plan account should be discussed with your financial advisor and your tax professional.

Can a Cash Balance Plan be Negative?

              Cash balance plans offer many benefits, but there are also important considerations. One such consideration is the impact of investment performance on plan funding. Because participants are generally entitled to the benefits provided under the plan, the employer is responsible for funding the plan and managing its investment strategy. If plan investments underperform expectations, the plan may experience a funding shortfall, which could require additional employer contributions to satisfy funding requirements.  Retirement Wealth Partners provides guidance and support to help plan sponsors evaluate funding obligations, investment considerations, and other factors associated with maintaining a cash balance plan.

Where can I find a Cash Balance Plan?

            Retirement Wealth Partners can help you establish, monitor and execute a cash balance plan for your business.