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What is a Cash Balance Plan

A Cash Balance Plan is a type of IRS-qualified retirement plan that operates under the rules of a defined benefit plan but gives the appearance of operating more like a 401(k) plan.  The account grows annually by  company contributions and an interest credit, which is guaranteed, rather than being dependent on the plan’s investment performance.  

A Cash Balance plan is not a replacement to a 401(k) and in fact is a popular ad-on to an existing 401(k) Profit Sharing Plan.  

Who Adopts

  • Business owners and self-employed individuals
  • Annual earned income of more than $200,000
  • Owners who need to generate 20 years of retirement savings in a 10-year span
  • Family or closely held businesses, CPAs, law firms, medical groups, professional firms, and the high earning self-employed

How do cash Balance Plans Work

Like a 401(k) plan, each participant has a promised benefit based on the value of the account.  Unlike a 401(k) plan, this account is hypothetical and Trinity Pension Consultants handles the recordkeeping.  The plan’s assets are pooled together and invested by the financial advisor.  Participant accounts increase each year based on a stated “pay credit” and “interest credit.” 

Pay credits can be a fixed dollar amount, a percentage of compensation, or some other formula. Interest credits are a fixed rate between 3% and 6%. The pay credit formula, interest credit and design of the plan are created and customized by our in-house actuarial team.

Once the participant terminates employment, he or she will be entitled to a single sum payment.  The participant could then roll that benefit to an IRA or another qualified plan. 

Current IRS Limits

The contribution limit determined by the actuary must abide by the limits of the corresponding year, determined by the age of the participant.  Below is an example of limits for a 401(k) Profit Sharing plan combined with a Cash Balance plan.

*401(k): $19,500; $6,500 catch-up; $38,500 profit sharing *Assume 40% tax, varies by state. Taxes are deferred.

About the author

Heather Craigg