Cash Balance Plans are defined benefit plans that look like profit sharing plans. Unlike a traditional defined benefit plan, where benefits are expressed as monthly benefits payable at retirement, a cash balance plan uses a separate account balance for each employee, then credits a percentage of the employee's pay (such as 4%) to the employee's account each year. Employee accounts grow based on interest credits, which can be determined each year. Like defined benefit plans, contributions are actuarially determined, and the employer is committed to making contributions. Like cross-tested plans, different allocation rates can be set for classes of participants and can potentially be changed prospectively each year.
Since they look like profit sharing plans, cash balance plans are usually easier for participants to understand. They usually provide higher benefits for younger employees and lower benefits for older employees, so the costs are higher for younger employees and lower for older employees.
| Name | Plan Compensation | Age | Cash Balance Credit |
|---|---|---|---|
| Dr. Smith | $230,000 | 53 | $100,000 |
| Dr. Jones | $230,000 | 49 | $100,000 |
| Office Manager | $48,000 | 39 | $5,760 |
| Physician Assistant | $35,000 | 30 | $4,200 |
| Technician | $35,000 | 33 | $4,200 |
| Nurse | $22,000 | 27 | $2,640 |
| Office Assistant | $20,000 | 25 | $2,400 |
| Total: | $219,200 | ||
| Dr. Smith and Jones receive over 91% of total contributions to the plan. | |||
Where they Fit:
- Target Employees are in their mid-40's or older
- Professional Practices
- Small closely-held businesses
- Client is able to make a commitment to contributions
- Client desires to go past the $46,000 limit ($51,000 if age 50 or older), but doesn't necessarily want to make the maximum available contributions
- A smaller disparity in the ages of target employees and other employees
- Target employees (e.g., physicians) have different retirement plan and contributions goals