cash balance plan

(redirected from Cash-Balance Plan)

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.
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cash balance plan

A qualified employer pension plan in which the employer guarantees a contribution level and minimum rate of return.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
They are increasingly combining a 401(k) plan with a profit-sharing and a cash-balance plan. "Some business owners say, 'We want to maximize what we can contribute, but we want to have only one plan,'" he says.
Yu, 2005, Cash-Balance Plan Conversions: Evidence on Excise Taxes and Implicit Contracts, Journal of Risk and Insurance, 72: 321-352.
Two major differences between a traditional defined-benefit plan and a cash-balance plan exist.
Meanwhile, cash-balance plan sponsors only recently have received some guidance by the Treasury Department and IRS with respect to issues under the Pension Protection Act of 2006.
"Rather than leave that cash 'just sitting there,' Hiller said, Zell is making use of it to fund the buyouts and -- in a program he announced Tuesday -- to make a one-time, cash contribution of 2% of employees' salaries to a new cash-balance plan early this year.
Courts have disagreed over whether or not the cash-balance plan discriminates against older workers and Congress has not moved to eliminate this uncertainty.
had discriminated against its older employees when it converted to a cash-balance plan.
One of the most important issues facing the pension world today involves companies replacing their traditional, defined-benefit pension plans with cash-balance plans. Although cash-balance plans have been around since 1985, they went virtually unnoticed until IBM wanted to establish a cash-balance plan in 1999 and some employees sued.
In the past, however, some companies used the shift from a traditional pension to a cash-balance plan to reduce sharply the pensions they paid longtime employees.
Under the plan - effective from 30 June 2003 - the airline will switch its non-pilot US employees to a cash-balance plan, which states the retirement benefit as an account balance rather than a monthly payment.
Long-time employees are likely to lose substantial benefits when an employer changes from a defined-benefit plan to a cash-balance plan. Workers in their 40s and 50s can see as much as a 30 to 50 percent reduction in their final benefits, with a resulting need to work extra years just to achieve the originally anticipated benefit.
In the past, plan sponsors might have been hesitant to convert an existing traditional defined benefit plan into a cash-balance plan because many courts had ruled that these plans were discriminatory on the basis of age; however, PPA provides legal certainty for employers and plan sponsors that establish a cash-balance pension plan by clarifying that they do not violate discrimination laws if certain conditions are met.