Cash Balance Plan Actuary: How to Select the Right One ✅


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The cash balance plan actuary is an important part of the cash balance process. They provide critical tasks that are required to set up and administer each plan.

But what do they actually do and are they actually required?

In this post, we will examine the responsibilities of the cash balance plan actuary. We’ll break down what they do and point out why they play such a crucial role in the administration process. Let’s take a closer look.

Cash Balance Basics

Retirement plans are separated into two categories: defined benefit plans and defined contribution plans. Cash balance plans fall under the define benefit plan umbrella, but they maintain individual employee accounts like a defined contribution plan.

Under a cash balance plan, an employee’s account earns a pay credit, normally 5% of their salary each year, plus an interest credit. The interest credit is based on a fixed rate or variable rate. Increases or decreases in asset values can impact the contributions, and the employer bears this risk.

The plan funding requirement is determined by an actuary. Most large plans are insured by the Pension Benefit Guarantee Corporation (PBGC). The main difference between a traditional defined benefit plan and a cash balance pension plan are the assumptions and formula used to calculate benefits.

What Does an Actuary Do?

Simply stated, the actuary will calculate the plan funding and certify to the IRS that the plan has met minimum funding guidelines. They are a critical participant in the process.

The most important thing they do is sign of on the Schedule SB. This is an important requirement. But they also perform other tasks associated with plan compliance. Take a look at a few below:

  1. An actuary advises the plan administrators and participants on the funding positions of the plan. The actuary carries out regular valuations on plan assets and investments.
  2. An actuary also conducts a plan valuation and provides advice on the contribution that needs to be paid in the future to achieve and maintain the plan objectives. An actuary will carry out a test to ensure that the contribution rate is not lower than what is allowable by the IRS and not too high for the plan to experience shortfalls.
  3. Cash balance actuary also analyses and advice the plan administrators of any financial consequences if any proposals to be implemented on the plan. An actuary should analyze outcome when changes to the plan rules are proposed or when augmentations of an individual’s benefit or group member’s benefits are considered.
  4. Cash balance plans allow are considered portable, meaning that an employee can shift their vested assets to another plan or roll into an IRA. Plan actuary is required to certify that the value offered to a member who wishes to transfer his or her benefits are calculated in accordance with the appropriate statutory and professional requirements.
  5. Plan actuaries also have a statutory duty to report to IRS, ERISA, and DOL any breaches of law that may be committed by plan administrators and plan participants. This function normally causes friction between plan trustees and their actuary, an actuarial adviser, who is not a plan actuary, therefore, does this function.
Pros & ConsActuary Tasks
Pro: Ensures ComplianceCalculate Annual Funding Levels
Pro: Provides Monitoring & ReviewPrepare Schedule SB
Con: Higher Plan FeesMonitor Compliance
Con: Complex Plan StructuresReview with Client & TPA

Does a Cash Balance Plan Need an Actuary?

Yes. Cash balance plans are a specific type of defined benefit plan. As such, actuaries must meet similar compliance requirements. This includes the requirement to have the plan certified annually by an actuary.

While cash balance plans are not new, their popularity in recent years has brought forth new features that make these plans increasingly complex. This has necessitated plan administrators to look for services of an actuary to assist manage the cash balance pension plan.

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Actuaries are well qualified to advise plan administrators on cash balance issues, especially about potential benefit payments, plan liabilities and how to balance the interests of the various parties involved. They also do assessments and communicate the likely financial impact of uncertain future events. It is critical for them to follow all cash balance plan rules.

Benefit Formula

The actuary will help the company establish the plan formula and pay credit. Some approved pay credits include:

  • $3,000 for each participating employee
  • 5% of employee compensation
  • $2,000 for each year of service
  • 5% of compensation for each employee with less than 60 points, and 6% of compensation for each participant with over 60 points. Points equal the sum of age and service years.

For example, let’s assume a company uses the 4th bullet point above. The company hires a 35-year-old who starts with 35 points. After ten years of service, the participant will be 45 or have 45 points. 

The actuary adds the pay credit to the current year’s W2 compensation at the end of the year. The plan document defines eligible compensation. It is generally W2 compensation, but could be adjusted for bonuses and other exceptions. 

Cash Balance Plan Actuary

Technical Actuarial Rules

The actuary will usually integrate the pay credit with social security limits. This allows benefits to be skewed to the higher compensated staff. 

An example is a 5% pay credit for a salary below the Social Security Wage Base and an 8% pay credit for any compensation above the base. 

The IRC provides the manner for determining the minimum required contribution and the maximum tax-deductible contribution for private pension plans.

For the annual valuation, assets and liabilities are determined using rules applicable to funding, including special interest rates, mortality tables, and funding methods. The interest rates established by the IRS have prescribed segment rates or yield curve for the month of valuation date or lookback month elected.

Professional DesignationsFunding Rules
Fellow of Societies of Actuaries (FSA)Certify IRS Schedule SB
College DegreeComplete Actuarial Valuation
Extensive Actuarial ExperienceCalculate Funding Range
IRS Enrolled Actuary DistinctionFinalize Form 5500

Funding Calculation

The actuarial firm will prepare an annual report to the plan sponsor, which documents the valuation results in a user-friendly format. This is called the funding valuation report. The valuation results are also reported to the government on the annual Form 5500 and Schedule SB or Schedule MB.

In funding, liabilities are determined based on the accrued benefit and the normal cost, which may include a one-year salary scale. For determining the maximum tax-deductible contribution, liabilities include the effect of future salary increases beyond the current year.

Normal cost represents the cost of benefits accruing in the current year. It is referred to as the Target Normal Cost in funding calculations and includes plan expenses.

The Funding Target liability includes all accrued benefits to date, while the Target Normal Cost includes only the current year accrual. In many cases, the actuary prepares a consolidated report to communicate the annual valuation results. This might show preliminary results and offer the plan sponsor specific funding options.

Actuarial Valuation Report

Once the plan sponsor makes decisions, the final results and reports will follow. The actuary can customize the report to meet the specific plan sponsor needs. The actuary may provide as many as three different funding reports:

  • Client meeting results.
  • Actuarial valuation report; and
  • Schedule SB.

A typical funding valuation report includes the following items:

  • Assets – reconciliation, market value, smoothed value (if applicable)
  • Liabilities – Funding Target, Target Normal Cost, and Maximum Funding Target
  • Participant census data – a snapshot, reconciliation, and average statistics such as average age and service
  • Plan provisions – a summary of plan provisions used in the valuation
  • Actuarial assumptions – a listing of the assumptions used, such as the interest rate, mortality table, salary scale, retirement age, and termination rates
  • Funding methods – both for assets and liabilities
  • Minimum required contribution – including quarterly contributions
  • Maximum tax-deductible contribution
  • “At-risk” liabilities (if applicable)
  • Credit balance calculations
  • Various funding level measurements including o Funding Target Attainment Percentage (FTAP) and o Adjusted Funding Target Attainment Percentage (AFTAP)
  • Certification of the report by the actuary

How to Select a Cash Balance Plan Actuary

The 5 steps to selecting the best actuary

  1. Have a few actuaries run illustrations

    Once you have narrowed down your search to just a few actuaries or administrators, have them run you a few illustrations. These illustrations should consider your expected W2 (or business income) and desired contribution. It probably makes most sense to model them with a 401k plan for the deferral and profit sharing. Compare and contrast the different illustrations and methodologies.

  2. Compare pricing and fee structures

    You will find many different set up fees and annual administration costs. Most plans will run $2k or so for set up and the annual administration will be in the $2k to $3k range. Some actuaries may apply discounts depending on your plan structure and how many employees you have.

  3. Consider the interest crediting rate and pay credit

    Most plans will use approximately 5% as the interest credit rate. This allows for adequate funding levels and is beneficial when there are employees other than the owner. The pay credit can vary and will be included in the plan document. It can range from 0% to over 100%. There can also be a separate pay credit for different employee classes. Let’s assume for this example the pay credit is 20%.

  4. Determine final W2 compensation or business profit

    Locate the employee census that will contain all the employee compensation. If you are a sole proprietor, then you will need the business profit from Schedule C. Let’s assume that this is an owner only plan with W2 compensation of $50,000.

  5. Calculate the year-end balance

    Let’s assume the beginning balance is $10,000. This will be your starting point. Here is the final calculation: ($10,000 × 1.05) + ($50,000 × 20%) = $20,500. Any actuary should be able to calculate this balance, but the formulas may slightly vary.

Understanding the Rules

Cash balance plans require solid investment returns to benefit participants. The actuary must review and analyze Investment allocations annually. If not, unexpected shortfalls can occur.

Companies should avoid significant unanticipated contributions, resulting in a strain on cash flows. Thorough planning and research should happen with essential decisions regarding shortfalls, asset allocation, and interest rates.

Cash balance plans have more extensive rules than those of defined contribution plans. But be careful. If an employer owns several businesses, it can be a significant complication. The combined businesses will likely have to cover all employees (with some limitations).

The IRS will typically view the businesses as a “controlled group.” If the owner has multiple business interests, an upfront discussion should occur with the CPA and plan administrator.

Finding a Qualified Cash Balance Plan Actuary

Plan sponsors or administrators bear investment risks for the plan. If the investment doesn’t provide the required returns, the administrator might require the company to make unanticipated contributions.

With the complexity of decisions to maximize returns, an actuary is required to help in managing responsibilities. Please note that actuaries only give advice, the decision-making powers are vested with the plan trustees. Pension rules are complex so make sure you do your diligence.

Final Thoughts

As you can see, a cash balance plan actuary is essential to keeping a plan compliant. Many business owners believe they can administer a plan themselves. But you now know this is not possible.

The IRS requires an actuary for compliance purposes. They can communicate results with the company, the CPA and the financial advisor. They are a valued partner in the process.

Hopefully, this article has spelled out some of the actuary’s critical roles and responsibilities. You also have gained some insight into the required certifications and designations.

But most importantly, you now know how important an experienced actuary is in the cash balance plan process. You have been educated on some of the critical details so you can select an actuary that will best suit your plan design

Paul Sundin

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