Cash Blanance
A Cash Balance Plan is a defined benefit plan that provides a contribution based on a percentage of salary and credits a rate of return on the contribution. It is considered a hybrid plan because it combines the contribution limits of a defined benefit plan with account balances that look like a defined contribution plan.
Overview
- Considers salary only
- Availability to equalize contributions for owners with the same compensation, but different ages
- Account value builds at a steady pace
- No employee contributions
- Defines the benefit in terms of a stated “account balance”
- Benefits are easier to understand compared to a traditional defined benefit plan
- Employee’s vested “account balance” is paid at retirement or termination
Considerations
- Annual contributions are required
- Employer bears investment risk
- Investment experience impacts contribution
- Three-year cliff vesting required
