Part 1: What is a Cash Balance Plan?
We are living in a land of increasing corporate and personal tax rates and we have money we are trying to hide (at least temporarily) from the government. What is a good solution for my company's retirement plan in order to avoid (again, temporarily) taxes, benefit employees and increase retirement savings? Is it a 401(k) plan, a profit sharing plan, a SIMPLE, or...even more complex, a Cash Balance Plan???
This will be a multi-part series blog related to Cash Balance plans. What they are, Who should implement one, What the risks are, etc. If at any time during this mind-blowing blog session, you would rather pick up the phone and call a pension expert, please feel free to click on the bright blue button below and get connected to a friendly Pension consultant at RPS.
What is a Cash Balance Plan?
- A qualifed plan that looks and feels like a defined contribution plan with high funding limits of a defined benefit plan
- It is a defined benefit plan, so the contributions each year are required
- Easy for participants to understand (unlike a traditional defined benefit plan)
- Funded entirely by the Employer
- Contributions are required to be calculated by an actuary each year to determine the funding required by the Employer
- The interest earned by each participant is stated in the plan document, so the account is not subject to market fluctuations
All qualified retirement plans require experts in the pension field to monitor and oversee the plans. However, a Cash Balance plan not only requires a knowledgable third party administrator, it also requires the oversight of an actuary. Therefore, these plans typically cost more than a traditional defined contribution or, even, defined benfit plan. However, the savings both into the plan (for participants and employers) and the tax savings advantages more than offset the administrative cost of the plan!