Cash Balance Plans

A Cash Balance Plan is a type of Defined Benefit Plan. By taking advantage of age and salary differences, a Cash Balance Plan tilts the contributions towards a desired employee or group of employees. Unlike a traditional Defined Benefit Plan however, a Cash Balance Plan provides a "hypothetical" account balance for the participants which accrues interest at a pre-defined government rate.

Advantages

If the demographics are right, the plan may provide contributions to the key employees in an amount much greater than allowed in even Cross-Tested Plans
Provides the ability to create multiple benefit levels
When combined with a 401(k) or Profit Sharing Plan, employer contributions to those plans can be used to allow larger contributions to key employees in both plans
Easier for employees to understand since their participant statements reflect a beginning balance, gains, and ending balance, much like a Defined Contribution Plan

Cash Balance Plans are Ideal for ...

Employers who are older than some of the staff employees
Employers desiring larger contributions for certain classes of employees
Employers with substantial resources
Employers with stable income

Disadvantages

Requires an individually designed plan document
Additional actuarial and administrative costs
Required contributions
May require PBGC premiums

Example

Following is an example of a Cash Balance Plan combined with a Cross-Tested 401(k) Plan. The objective of this plan design is to provide the owners with a substantial contribution amount each year, while minimizing the required employer contribution to the staff.

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How Complicated are Cash Balance Plans?

Cash Balance Plans are the most complicated plans to administer. Without the proper administrative services, a Cash Balance Plan can turn into a nightmare for the plan sponsor. An integral part of the complexities of a Cash Balance Plan is in the plan design. If the proper care is taken during the plan design process, Cash Balance Plans are sure to meet the objectives of the plan sponsor.

Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff. Our services include all functions necessary for the smooth operation of your plan, including Plan Design, Documentation, Employee Communication, and Complete Administration.

We have the expertise to determine if this type of Plan is for you!