Employers contribute a specified percentage of each employee’s salary to the plan annually. This percentage is predetermined and is often referred to as the “pay credit.” These plans are fully funded by employers and do not require or allow employee contributions.

The plan provides annual interest credits to the employee’s account balance. These interest credits are typically based on a fixed rate or a variable rate linked to an index (e.g., the yield on 30-year Treasury securities). The interest credit ensures the account grows steadily, which can offer more predictability compared to the market-driven returns of DC plans.

Although the plan describes benefits in terms of an account balance, these accounts are hypothetical. The actual funds are pooled and managed collectively by the plan sponsor. Employees receive regular statements showing their notional account balances, making it easy for them to understand their accrued benefits.

Cash balance plans have vesting schedules that determine when employees acquire full ownership of the employer contributions and interest credits. Vesting can be immediate or spread over several years. Since these plans only utilize cliff vesting schedules, participants are either non-vested or fully vested. There are no partially vested participants which is possible in DC plans.

Upon retirement, employees can choose to receive their benefits as a lump sum payment or as an annuity. The lump sum is equivalent to the account balance, while the annuity is calculated based on the balance and life expectancy. This choice provides flexibility in retirement planning, catering to different financial needs and preferences.

An enrolled actuary ensures that Cash Balance Plans are designed to meet company objectives while also complying with regulatory requirements. They calculate and certify annual funding requirements, determine contribution limits, and calculate participant benefits. By providing insights into participant demographics and market impacts, enrolled actuaries help businesses maximize tax deductions and efficiently manage their retirement plans.

Cash balance plans offer higher deduction limits than 401(k) plans, primarily due to their defined benefit structure, which allows for larger, employer-funded contributions tailored to meet specific future benefit obligations. This makes them particularly advantageous for employers looking to maximize tax-deductible contributions and for older employees seeking to accelerate their retirement savings. Depending on age and salary, annual contributions can range from $100,000 to several hundred thousand dollars.