Defined Benefit
Cash Balance Plans

A cash balance plan may be an option to consider when reviewing options for a retirement plan since it has both the benefits of a defined benefit plan and the simplicity of a defined contribution plan.

What is a cash balance plan?

In general, defined benefit plans provide a specific benefit at retirement for each eligible employee while a defined contribution plan provides a benefit based on contributions deposited on behalf of the employee and adjusted for the gains and losses accumulated by the plan investments.

A cash balance plan is a defined benefit plan that defines the benefit for the employee but has the characteristics of a defined contribution plan. Hence, the employee’s account will be represented similar to a defined contribution plan on his/her account statements.

How do cash balance plans work?

In a cash balance plan, an employee’s account is credited each year with a specified pay credit and an interest credit. An example of a pay credit would be a percentage of compensation or a points system. The interest credit can be either a fixed rate or a variable rate linked to an appropriate index such as the one-year Treasury bill rate. However, the increases and decreases of the plan investments do not directly affect the amounts guaranteed under the pay credit and interest credit formulas are borne completely by the employer.

When an employee is entitled to receive benefits from the cash balance plan, the benefits received are defined in terms of an account balance. This allows the employee the ability to either choose his/her benefit in a lump sum benefit equal to his/her current account balance or the traditional annuity payment. In addition, cash balance plans often permit vested participants to receive their accrued benefits in lump sums prior to retirement age in the event they terminate employment with the employer.

How do cash balance plans differ from traditional pension plans?

Both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s account in the form of a series of payments for life. Traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.

Can my current defined benefit plan be converted to a cash balance plan?

A defined benefit plan can be converted to a cash balance plan. There are specified regulations to be followed in order to complete the conversion. Federal law does place restrictions on plan changes which require amendments to the plan document in order to convert the traditional defined benefit formula to a cash balance formula. The changes in the plan types and benefit formulas cannot reduce benefits already earned by the employee. In addition, advance notification of the plan changes and other legal requirements must be completed.

What are the first steps to getting a cash balance plan started?

If you are interested in exploring a cash balance plan, please contact Resource Benefits Administrators at (254) 776-6214 or (512) 342-1652 and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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