What is a Cash Balance Plan?

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Demystifying the Cash Balance Plan

A Real-World Scenario

Consider Allison and James, co-owners of a bustling consultancy firm with a four-member operations team supporting their daily endeavors. At 62, both Allison and James are considering aggressive savings strategies for their golden years.

Upon evaluating their retirement strategy, it was discerned that both could allocate $158,400 annually towards their retirement funds. Taking into account the support team’s demographic and income profile, the total contribution for these employees stood at $18,400 for the year. The distribution amongst the staff was contingent on age and salary benchmarks. In this fiscal year, the firm’s combined contribution to the 401(k) and Cash Balance plan amounted to $335,200, with a staggering 94.2% directed towards the principal partners.

A Snapshot


  • Allison: $158,400
  • James: $158,400

These figures are indicative, contingent upon annual evaluations and company demographics.

Support Team:

  • Team Member A: $6,050
  • Team Member B: $3,900
  • Team Member C: $3,950
  • Team Member D: $4,500

The annual employer’s commitment undergoes recalibration based on the dynamic average salary and age profile of the eligible staff pool.

The Cash Balance Plan Explained

Cash Balance Plans represent a niche within employer-sponsored Defined Benefit (DB) retirement schemes. Distinct from conventional DB plans, which earmark a monthly stipend upon retirement, Cash Balance Plans guarantee a predetermined account sum.

Commonly, these are complemented with a 401(k) strategy, with funding shouldered by the employer. The plan’s blueprint elucidates eligibility and contribution quotas. Notably, fluctuations in the investment portfolio do not impinge upon the end-game benefits a participant is entitled to at the closure of their tenure or retirement. The enterprise exclusively navigates the financial ebb and flow tied to the portfolio, ensuring annual contributions remain unaffected, underlining the significance of robust company revenue.

For the layperson, annual statements from Cash Balance Plans mirror those from 401(k)/Profit Sharing plans. This resemblance augments comprehension and is lauded by employers and employees alike, the former reaping tax benefits and the latter fortifying their retirement reservoir.

Why haven’t I encountered this before? It’s a question we often encounter, given the specialized nature of such plans.

  • Is this above board? Absolutely. [DOL guidelines provide clarity.]
  • What’s the maximum I can allocate? It’s contingent on age and earnings. Some professionals can earmark upwards of $210,000 annually via a comprehensive Cash Balance plan.
  • Any caveats? No underlying pitfalls. However, there are operational specifics to be apprised of, such as the annual funding imperative. We’re here to delve deeper and assess if a Cash Balance scheme aligns with your enterprise’s objectives.