Cash Balance Plans

How These Plans Work
  • A cash balance plan defines the promised benefit in terms of a stated account balance; it is a defined benefit plan that looks like a defined contribution plan
  • Participants in cash balance plans have hypothetical accounts
  • No actual contributions or investment gains (losses) are directly allocated to hypothetical accounts
  • The plan sponsor manages investments of plan assets, not the participants
  • With each year of service a participant’s hypothetical account is typically credited with both “pay credits” and “interest credits”
  • Pay credits can be a flat dollar amount but are typically a percentage of the participant’s pay while interest credits are the rate at which the account will grow and can be a fixed interest rate or a variable rate linked to an established index, such as Treasury yields
  • At retirement or termination a participant is entitled to his/her hypothetical account balance at that time
  • Retirement benefits are typically payable as a lump sum or a lifetime annuity; lump sum distributions are eligible for rollover to an IRA or another qualified retirement plan
  • A certain level of benefits is insured by the Pension Benefit Guaranty Corporation (PBGC), a government agency; plan sponsors are required to pay annual premiums to secure this protection
Things To Note
  • Cash balance plans are particularly appealing to professional service firms with partners or owners who want to maximize their tax-sheltered retirement income and tax-deductible contributions
  • Cash balance plans often work in conjunction with existing 401(k) and profit sharing plans to deliver a cost effective way to provide meaningful retirement benefits to rank and file employees while maximizing benefits to the partners or owners
  • Cash balance plans can exclude rank and file employees as long as they meet IRS minimum participation and coverage requirements
  • Services of an actuary are required to determine the annual company contributions necessary to fund benefits
  • “Pay credits” can vary for covered individuals, subject to nondiscrimination testing
  • If the plan sponsor also offers a defined contribution plan (such as 401(k) or profit sharing), complex testing must be performed in order to ensure that benefits provided in aggregate are not discriminating in favor of highly compensated employees
  • To satisfy nondiscrimination testing, plan sponsor may have to give rank and file employees higher profit sharing allocations
What We Can Do
  • Evaluate your objectives and perform a feasibility study to determine if a cash balance plan is right for you
  • Consult with you on regulatory changes and emerging trends
  • Perform modeling to determine the costs of varying pay and interest credits
  • Provide actuarial services to determine the annual company contributions
  • Calculate the annual FAS 87 expense for inclusion in the company’s financials
  • Prepare the annual FAS 87 financial statement disclosure
  • Prepare the annual 5500 return/report required by the IRS with the required actuarial certification (Schedule B), including any necessary interface with the plan’s independent auditors
  • Prepare the annual PBGC premium filing
  • Perform annual coverage and nondiscrimination testing
  • Maintain hypothetical participant accounts
  • Prepare individual benefit statements for covered individuals
  • Help with communication materials and meetings with covered individuals
  • Prepare plan documents, plan amendments, and required communications to covered individuals
  • Assist in qualifying the plan with the IRS, including preparation of IRS submissions
  • Assist with any IRS or DOL audit of the plan