cash balance plan


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Cash Balance Plan

A pension plan that combines features of a defined-benefit plan and a defined-contribution plan. Like a defined-benefit plan, a cash balance plan guarantees the pensioner a certain benefit upon retirement. That is, the amount one receives from a cash balance plan does not vary according to the performance of some portfolio. Like a defined-contribution plan, the employer agrees to place a certain percentage of one's salary into the plan each year, and accounts are created on an individual basis. A cash balance plan can be rolled over into another account if the employee changes jobs. As a result, it is relatively popular with younger workers.

cash balance plan

A qualified employer pension plan in which the employer guarantees a contribution level and minimum rate of return.

Cash balance plan.

A cash balance retirement plan is a defined benefit plan that has many of the characteristics of a defined contribution plan.

The benefit that you'll be entitled to builds up as credits to a hypothetical account. The hypothetical account is credited with hypothetical earnings, based on a percentage of your current pay.

These plans are portable, which means you can roll them over from one employer to another when you change jobs. That makes them popular with younger and mobile workers.

But they are often unpopular with older workers whose employers switch from a defined benefit to cash balance plan because their pensions may be less than with traditional defined benefit plans.

References in periodicals archive ?
Working professionals who own a portion of their firm are uniquely positioned to derive value from a cash balance plan because their salary generally is relatively high.
The Solution : You may be the perfect candidate for a Cash Balance Plan.
Under a cash balance plan, the benefit is determined by the amount contributed and a stated rate of return.
She explains that the conversion to a cash balance plan is an attempt "to maintain much of the value of the pensions for employees while at the same time man-aging the liabilities that the employer is going to have to bear.
We estimate, for instance, that the chance of worsening teacher effectiveness is about 60 percent with a cash balance plan and 70 percent with a DC plan under optimistic assumptions that favor alternative benefit designs based on the existing long-standing literature on pensions and turnover and the much smaller literature on initial compensation and teacher effectiveness.
The beauty of incorporating a cash balance plan is that the contributions are a tax-deductible expense for the firm and its remaining younger business owners.
A cash balance plan is a defined benefit plan that specifies the amount of contribution to be credited to each participant.
Thus, if you converted a traditional defined benefit plan to a cash balance plan prior to this date, the PPA provides you no assurance that the conversion did not result in age discrimination.
Birgit Anne Waidmann, manager, PricewaterhouseCoopers Human Resource Services practice, says that often, in converting a traditional DB plan to a cash balance plan, an age-weighted formula is used for the annual credits under the cash balance plan, in order to mimic the traditional plan's backloaded design.
In 2003, 87 percent of cash balance plan participants received a percentage of employer contributions based on one or a combination of factors, with age (62 percent) and service (58 percent) being the most common.
The group said it held discussions with staff before setting up the new cash balance plan, and the company was also paying for its workers to take financial advice on which scheme they should be in.