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February 18, 2009

Cash Balance Plan

Your Guide

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Definition

A defined benefit plan that includes

(a) career average’ features of a  defined benefit plan, which uses a participant’s  earnings history to determine the  benefits,  and

(b) defined contribution plan features, which defines the promised benefit in terms of a stated account balance.

Referring Cite

Treas. Reg. §1.401(a)(4)-8(c)(3)

Additional Helpful Information

    • In a typical cash balance plan, a participant’s account is credited each year with a pay credit (such as 5 percent of compensation from his or her employer) and an interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer.(DOL)
    • The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.
    • A defined benefit plan that includes separate account for each participant, a feature which is not usually included in defined benefit plans.
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