An Introduction to Cash Balance Plans for Employers

Company retirement plans come in different forms these days. While traditional pension plans are becoming less common, new options like cash balance plans are emerging. Cash balance plans provide flexibility and tax benefits for both employers and employees.

For companies seeking an affordable retirement plan that will support their compensation package, the cash balance option is worth checking. While new, these plans are reshaping retirement benefits and allowing both employers and employees to save for the future.

What is a Cash Balance Plan?

A cash balance plan combines the features of defined benefit and defined contribution plans. These modern plans blend both best plans into a new hybrid model. They provide fixed, guaranteed returns like a pension but with the portability of a 401(k) plan.

For companies, a cash balance plan offers tax deductions and is the best way to attract and retain top talent. For employees, they deliver a retirement benefit that is easy to understand with the opportunity for investment growth.

Key Features of Cash Balance Plans

Cash balance plans offer several key features that benefit both employers and employees. These include:

Flexibility

A cash balance plan provides flexibility in contributions. Employers can contribute a fixed fraction of pay or a flat dollar amount each year, whichever they prefer. Changing contributions is possible from year to year based on what works best for the company.

Portability

Cash balance plans are portable. Employees can roll over account balances upon leaving the company. They can roll funds into an Individual Retirement Account (IRA). They can also roll it over into their new employer's retirement plan. This feature is appealing to job hoppers and those with mobile careers.

Predictability

With a cash balance plan, employees know exactly how much they and their employer will contribute each year. Their account balance grows at a certain rate. They have a predictable source of retirement income. Employers also gain predictability in budgeting for retirement plan contributions.

Tax Benefits

Contributions to a cash balance plan are tax deductible for employers and tax deferred for employees. The funds in the account can grow and compound over time without being taxed until withdrawn in retirement.

To sum up, the flexibility, portability, predictability, and significant tax benefits of a cash balance plan make it an attractive option for employers looking to provide retirement plan benefits. Applying a cash balance plan allows companies to offer a viable retirement package while maintaining control over costs.

Benefits of Cash Balance Plans

Cash balance plans offer several benefits for employers.

• Flexible and allow companies to customize them based on their needs and goals. They can also adjust contribution amounts and investment options as needed to match business goals.

Easy to understand and explain to employees. Members can see their account balances grow over time through employer contributions and investment returns. This straightforward design helps employees appreciate the value of the benefit.

• Reduce age-bias risks. All employees receive the same portion of the contribution and investment opportunity. This avoids favoring younger or older employees.
• Vesting schedules for cash balance plans are flexible but often faster than traditional pensions. Allows employees to become entitled to benefits sooner, which can aid in attracting and retaining top talent.
• Provide tax benefits for employers, such as tax deductions for contributions and tax credits. They also offer more predictable costs since contributions are defined and limited each year.
• Employees can roll over assets from cash balance plans to IRAs or new employer plans if they leave the company. This provides portability and lifetime income opportunities.

Overall, a cash balance plan is an appealing option for employers looking to provide a retirement benefit that is competitive yet affordable. The flexibility, simplicity, and tax advantages make them a worthy choice for companies wanting to attract and retain quality employees over the long run.

How does a Cash Balance Plan Work?

A cash balance plan is a defined benefit plan that works similarly to a defined contribution plan. It involves pooling contributions together in hypothetical "accounts" for each employee. The accounts earn a fixed rate of interest annually. When an employee retires, their account balance is used to calculate their benefit amount.

Employees who take part in cash balance plans get the portability of a 401(k) with the security of a pension-like sure retirement benefit. Each year, employers contribute a certain portion of an employee's salary. They charge the employee's account with that sum of money.

The accounts earn interest at a fixed rate, so employees get the benefit of compounding returns over time. Employees can see their account balances grow each year. This gives them a concrete sense of the value of their benefit.

If an employee leaves the company before retirement, they can have the full value of their account balance. They can roll it over into an IRA or their new employer's retirement plan. At retirement, employees can take their benefit as a lump sum or convert it into an annuity for secured lifetime income.

A cash balance plan provides stable benefits for employees and predictable costs for employers. The amount employers need to contribute is based on the plan's benefit formula, not on market returns.

Is a Cash Balance Plan Right for Your Company?

A cash balance plan can be an attractive option for companies looking to maximize tax-advantaged retirement plan contributions for employees. But these plans are complex, so employers must consider if the benefits outweigh the costs.

Cash balance plans provide flexible benefits for companies. Contributions can vary annually, depending on the company’s financial situation. The plans also give employers more control over investment options. The employer directs how to invest the contributions, though employees still choose how they can invest their own balances.

On the other hand, a cash balance plan tends to be more expensive to manage than 401(k)s. The required annual actuarial valuations and paperwork can cost thousands of dollars. A cash balance plan may also require steep initial setup fees. Some small companies may find the costs excessive.

For many mid-size and large companies, the tax and retirement benefits of cash balance plans are worth the investment. Executives looking to extend tax-deductible contributions and provide large retirement benefits must consider a cash balance plan. With some research into options and costs, a cash balance plan is a perfect fit.

In summary, a cash balance plan seems like a win-win for companies and employees. For employers, they provide more expected costs and liabilities compared to traditional pension plans. Employees get a straightforward benefit that offers a secured income for life after they retire.