Cash Balance Plan FAQ

A. Because a cash balance plan is a defined benefit plan, the maximum contribution amounts are based on current age. For example, a 52-year-old could potentially contribute approximately $130,000 per year, and a 57-year-old can contribute approximately $170,000 per year. These amounts can increase as the participant gets older. They can also increase with cost-of-living adjustments to the limits.

A. The short answer is “Yes.” If the employer contributions (excluding employee deferrals) to a 401(k) plan do not exceed 6% of plan compensation in the aggregate, then the cash balance contribution can be the maximum described above. Otherwise, the total employer contributions to both plans cannot exceed 31% of total plan compensation.

A. For 2020, plan compensation is limited to $285,000 (as indexed). This amount is typically W-2 income. For sole proprietors, plan compensation is Net Schedule C income minus 1/2 of the self-employment tax minus qualified plan contributions.

A. All qualified plans must pass certain non-discrimination tests. Many times, it is advantageous to pass the tests by providing a higher contribution in the 401(k) plan and providing a lower benefit in the cash balance plan for employees.

A. Like any defined benefit plan, the benefit must be definitely determinable and cannot be discretionary. Amendments can be made to adjust the benefit, but amending too frequently may create qualification problems from the IRS.

A. The normal form of payment from a defined benefit plan is an annuity payable from normal retirement for the life of the participant. Typically, upon termination or retirement, the lump sum value of the annuity is rolled over to an IRA. For a cash balance plan, the hypothetical account balance is rolled over to an IRA.

A. In a cash balance plan, each participant’s balance is increased by contribution credits and interest credits. The contribution credit is typically a percent of plan compensation. The interest credit is a set rate, either tied to an investment index or a flat rate, like 5%. The set interest credit is one of the provisions that makes a cash balance plan a defined benefit plan. The benefit is the same, regardless of actual earnings.

A. If the investments earn more than the interest credit, then future contributions are decreased.