Cash Balance Plans Profiler

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with an advisor in Kentucky is representative of a common inquiry related to cash balance defined benefit plans. The advisor asked: “Some of my business owner clients would like to contribute more than $58,000 annually to a retirement plan and have asked about cash balance plans.  Can you give me a brief rundown on cash balance plans, including who would be the most likely candidates for them?” Highlights of discussion  

• According to the, 2020 National Cash Balance Research Report, cash balance plans now account for 42% of all defined benefit plans, up from 3.2% in 2001.   

• A cash balance plan, sometimes referred to as a hybrid plan, is a type of defined benefit plan that resembles a defined contribution plan. Like a traditional defined benefit plan, the employer bears the investment risks on plan assets and guarantees a determinable benefit to eligible participants.  

• Where a cash balance defined benefit plan resembles a defined contribution plan is the allocation formula and the promised benefit, which is stated in terms of a hypothetical account balance. These accounts are hypothetical because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.  

• In a typical cash balance plan, a participant's hypothetical 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). 

• In a cash balance plan, the sponsoring employer does not make contributions to accounts for individual participants. Instead, the employer makes contributions to the plan’s trust, based on the minimum funding requirements for defined benefit plans. Because cash balance defined benefit plan contributions must equal what is needed to fund the promised benefits, they are not limited by the per-participant annual maximum contribution amounts that apply to defined contribution plans (i.e., $58,000 or $64,500 for those ages 50 and greater for 2021). Therefore, required contributions to a cash balance defined benefit plan can be substantially more than those for a defined contribution plan. 

• Cash balance plans are popular among law firms, medical groups and professional firms, such as CPAs, architects and consultants.  

Cash Balance Plan Profiler 

When contemplating a cash balance defined benefit plan answer these important qualifying questions: 

The more “yes” responses the greater the possibility that a cash balance defined benefit plan would be a good fit. 

Conclusion 

Cash balance defined benefit plans can be the right fit for certain businesses that have precise goals and meet certain criteria. Business owners that want to establish a retirement plan should do so only after thorough discussions with their tax advisors and/or legal counsel.