Cash Balance Plans provide a retiremnent benefit equal to the accumulated value of an account balance. This accumulated account balance is computed based on plan contribution rates and investment income stated in a plan document rather than on actual contribution and investment experience. For instance, a cash balance plan might define the contribution rate as 10% of an employee's compensation and define the investment rate as 5.0% per annum. The benefit the employee receives is the balance in this account at retirement. Now, the actual investment performance of the trust which receives the true employer contributions may be less than or greater than 5.0%. If the underlying trust performs better than 5.0%, employer contributions are reduced. If the underlying trust performs below 5.0%, employer contributions are increased. So true investment performance doesn't affect the employee's retirement benefit - the employee is essentially guaranteed a 5.0% investment return on his cash balance account.
In our area of cash balance plan practice, we are often dealing with a closely held corporation which has one or more principals who will participate in the cash balance plan. In certain situations, cash balance plans offer unique opportunities which are not available in other qualified retirement plan designs. The primary advantage of a cash balance plan is the ability of the principal(s) to receive contributions in excess of the maximium contribution limits under ยง415 for defined contribution type plans ($51,000 for 2013). If the principals are willing to offer this guaranteed investment return in order to take advantage of higher contribution limits, then a cash balance plan may be a good fit.
The following is an illustration of a cash balance plan installed on top of an existing 401(k) profit sharing plan.
| Employee | Age |
Annual Compensation Rate |
401(k) Elective Deferrals |
Employer 3% Safe Harbor Contributions |
Profit Sharing Contribution |
Cash Balance Plan |
Total Contributions |
| Owner1 | 60 | 255,000 | 17,500 | 7,650 | 25,850 | 45,569 | 96,569 |
| Owner2 | 55 | 255,000 | 17,500 | 7,650 | 25,850 | 45,569 | 96,569 |
| Owner3 | 50 | 255,000 | 17,500 | 7,650 | 25,850 | 45,569 | 96,569 |
| Sub-total | 765,000 | 52,500 | 22,950 | 77,550 | 136,707 | 289,707 | |
| Staff1 | 45 | 50,000 | 1,500 | 2,941 | 750 | 5,191 | |
| Staff2 | 40 | 40,000 | 1,200 | 2,352 | 600 | 4,152 | |
| Staff3 | 35 | 35,000 | 1,050 | 2,058 | 525 | 3,633 | |
| Staff4 | 35 | 30,000 | 900 | 1,764 | 450 | 3,114 | |
| Staff5 | 30 | 25,000 | 750 | 1,470 | 375 | 2,595 | |
| Staff6 | 30 | 25,000 | 750 | 1,470 | 375 | 2,595 | |
| Staff7 | 30 | 25,000 | 750 | 1,470 | 375 | 2,595 | |
| Staff8 | 30 | 25,000 | 750 | 1,470 | 375 | 2,595 | |
| Staff9 | 30 | 25,000 | 750 | 1,470 | 375 | 2,595 | |
| Staff10 | 25 | 20,000 | 600 | 1,176 | 300 | 2,076 | |
| Staff11 | 25 | 20,000 | 600 | 1,176 | 300 | 2,076 | |
| Staff12 | 25 | 20,000 | 600 | 1,176 | 300 | 2,076 | |
| Sub-total | 340,000 | 0 | 10,200 | 19,993 | 5,100 | 35,293 | |
| Grand Total | 1,105,000 | 52,500 | 33,150 | 97,543 | 141,807 | 325,000 | |
| Ratio of Pirincipal to Employee | 2.3 to 1 |
3.9 to 1 |
26.8 to 1 |
8.2 to 1 |