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 in recent years as an alternative to (or replacement of) the traditional defined benefit pension plan. Though it is technically a form of defined benefit plan, the cash balance plan is often referred to as a "hybrid" of a traditional defined benefit pension plan and a defined contribution plan. This is because cash balance plans combine certain features of both defined benefit and defined contribution plans. Like traditional defined benefit plans, cash balance plans pay a specified benefit amount at retirement. However, like defined contribution plans, participants have individual (albeit hypothetical) accounts, allowing for easy tracking of accrued benefits.

How Does a Cash Balance Plan Work?

            Each participant in a cash balance plan has a hypothetical individual account or "cash balance" established for record-keeping purposes. With these hypothetical accounts, participants can easily view their accrued benefit at any time. However, the employer does not contribute to individual participant accounts. Instead, they contribute to the overall plan, and all of the plan assets are held in one pension trust fund.

             With a cash balance plan, the employer makes contributions on a regular basis (e.g. annually or monthly).  The amount credited is usually a percentage of the participant’s salary.  Additionally, each participant’s account is increased by an “interest credit” which can’t exceed a “market rate of return.”  This rate of return is generally a fixed rate which is specified by the plan.  The IRS publishes maximum contributions and guidelines which govern the market rate of return requirement each year.

              The amount that the employer can contribute to the plan each year is actuarially determined, based in part on the contributions and earnings credited to the hypothetical accounts.  Actuaries base the amount of plan contribution on several factors, including:

• Retirement benefits promised by the plan
• Age, sex, salary, and retirement age of the participants
• Projected interest to be credited to the participants’ accounts
• Projected future salary increases of the participants
• Projected rates of turnover, disability, and mortality of the participants

Are Cash Balance Plans Subject to ERISA?

          Yes, cash balance plans are subject to the Employee Retirement Income Security Act (ERISA) for most private-sector organizations.  Cash Balance plans are qualified employer-sponsored retirement plans and therefore have certain rules and requirements imposed upon them.  Some of the requirements include:

• Funding Standards
• Fiduciary Responsibility
• Reporting and Disclosures
• Testing of the Plan

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

              A significant benefit of a cash balance plan is that the vested plan benefit is generally “portable.”  Meaning that the funds can generally be rolled over to another employer’s retirement plan or to an IRA should a participant terminate employment prior to retirement age.  Rolling the account over to an IRA or another qualified plan is not a taxable event as the funds move from one qualified account to another.  This can be a good way to consolidate retirement accounts and continue growing your savings on a tax-deferred or tax-free basis.  Retirement Wealth Partners can help you navigate this decision to ensure that your next retirement account is eligible for the rollover and explain in depth some additional considerations prior to making your move.

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?

              There can be some challenges associated with a cash balance plan to be aware of.  One important concept is market losses impacting plan funding.  Because participants benefits are generally guaranteed by the pan, the plan is funded and invested by the employer.  Should the plan’s investments perform poorly, the plan might experience funding shortfalls which may require additional contributions.  Retirement Wealth Partners has the experience necessary to shepherd your plan to reduce the possibility of negative outcomes.

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.