The Eligibility Guide for Cash Balance Plans [Quick Step Guide]

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Cash balance plans come with a complex design that is a big concern for many business owners. But do you know who is eligible for cash balance plan?

Most people are OK contributing a specified amount for their employees. They just don’t want to be stuck with a contribution they can’t afford.

Eligible EmployeesNot Eligible
Age 21 or OlderEmployees Hired During the Current Year
S-Corp Owners Who Work 1,000+ HoursPart-Time Employees
Sole Proprietors with No EmployeesPassive Owners
Must Incur Payroll TaxEmployees Age 20 or Younger

For this reason, employee eligibility can make or break a plan. The regulations spell out specific minimum standards that each employer must meet.

In this post, we will detail the eligibility requirements and explain a few provisions that you can use to your benefit. Let’s get started!

Who is Eligible for a Cash Balance Plan?

  • Must be at least 21 years of age
  • Must work at least 1,000 hours
  • Started working in the prior year


If you’re in the market for a new retirement plan, you may want to consider a cash balance plan. These plans offer an inexpensive option for retirement benefits for most entities.

Cash balance plans credit a participant’s account each year based on his or her compensation. A typical example is a participant with a $100,000 account balance at age 65. That person would then be eligible for a monthly amount of ten thousand dollars a year for the rest of his or her life.

However, it’s also possible to take a lump sum benefit if the account value were lower. In that case, the employer would bear the investment risk, while the participant would receive the lump sum.

While they differ from 401(k) plans, they are similar in their structure. A 401(k) plan guarantees a fixed monthly benefit, while a cash balance plan guarantees a specific amount.

Most allow participants to roll vested balances into another type of retirement plan, such as an IRA or 401k. You can also roll the money if you leave your employer. But before you make a move, you need to know what you need to do to be eligible.

As long as the employer is willing to make the full contribution, the cash balance plan is an excellent choice for most businesses. However, there are some caveats. As with any other retirement plan, the key to cash balance plan eligibility is knowing what the plan is and how much it will cost.

Who is eligible for cash balance plan?

There are many rules and requirements for these plans. But let’s point out the top three cash balance plan eligibility requirements:

  • Age restrictions. Cash balance plans have age restrictions. You are allowed to exclude anyone under age 21 from eligibility.
  • Year one exclusion. You can also limit the number of employees by requiring a specific amount of time before participation. For example, you can use a one-year service requirement to reduce eligibility if you have a company with a high turnover rate.
  • Minimum hours. You can restrict participation based on the number of hours worked during the plan year. The company can limit the plan to only those employees that work over 1,000 hours.

The entrance date is when a plan allows employees to enroll once the service conditions and age requirements are met. Typical entrance dates are monthly, quarterly, semi-annual or annual.

Companies with large employee turnover may desire to keep transient employees off their plan by making an annual service requirement. This is the most restrictive timeline that is eligible under the regulations.

A defined benefit plan is a type of retirement plan in which an employer makes contributions to a trust on behalf of eligible employees. The amount of the benefit that an employee will receive upon retirement is typically based on factors such as the employee’s salary and years of service.

Eligibility for a defined benefit plan is typically determined by the employer who sponsors the plan. In general, most defined benefit plans have eligibility requirements that are based on factors such as age, length of service, and job classification. For example, an employee may need to be at least 21 years old and have worked for the employer for a certain number of years in order to be eligible to participate in the plan.

It is important for employees to carefully review the terms of their defined benefit plan and understand the eligibility requirements. If you have questions about your defined benefit plan and whether you are eligible to participate, you should contact your employer or the plan administrator for more information.

Cash balance plans are subject to many rules and regulations set by the Internal Revenue Service (IRS) to ensure that they are operated in a non-discriminatory manner and provide reasonable benefits to employees.

Specific eligibility requirements

A computation period is a time period of 12 consecutive months selected by the employer. It is defined in the plan document. A plan must designate a computation period for measuring years of service for eligibility, vesting and benefit accrual except if the elapsed time method is selected.

For example, the years of service or participation an employee earns will be dependent upon the number of hours worked for the duration of the computation period.

A year of participation (or credited service) can be any consistent 12 consecutive month period designated by the plan. Under Department of Labor (DOL) regulations, a plan is not required to take into account any such 12-month period during which the employee has fewer than 1,000 hours of service.

Because of this rule, normally, a plan requires the participant to complete at least 1,000 hours of service in a year in order to qualify for a year of credited service. However, a plan can be more liberal by requiring less than 1,000 hours for a year of credited service.

Hours of service alternatives

Other alternatives exist and defined benefit plans offer great flexibility to plan sponsors. Seasonal industries, in particular, may require a reduced number of hours of service. A plan may require more than 1,000 hours of service for a year of benefit accrual (e.g., 2,000 hours) provided that prorated accruals are credited for those with fewer than the required hours but more than 1,000 hours. This proration can only be made in plans with certain types of benefit formulas.

know who is eligible for cash balance plan

For example, a fixed benefit of $50 per month per year of participation could use a proration.
A plan that establishes benefits on the basis of hours worked or compensation received generally could not use proration since the accrual has already been prorated by adjusting for hours worked or compensation received.

How does eligibility work?

The benefits accrued in a cash balance plan are subject to income taxation when withdrawn during retirement. This means that maximizing the tax benefits of a cash balance plan requires careful analysis of your future tax situation.

However, if you make the right decisions, you’ll enjoy the best possible retirement. If you’re unsure, you can work with your employer to determine how much you need to contribute and make the most tax-efficient contributions.

Vesting requirements

Recent IRS tax changes have clarified vesting requirements of cash balance plans. Generally, cash balance plans have more restrictive vesting schedules than other qualified plans. However, vesting schedules can be favorably structured.

All plan participants must be 100% vested after three years of plan participation. As a result, most plans are established with three-year vesting.

This means that participants are not vested at all in any plan contributions until they reach the third year of service. At this point, they are 100% vested. If any participant is terminated before the third year of service, all contributions are then forfeited and can be used to reduce future contributions.

Minimum hoursEmployees must work at least 1,000 hours a year to qualify for participation.
Age restrictionsEmployees must be at least 21 years old to participate.
Entrance dateYou can exclude employees who were hired during the year.

Formula rules on eligibility

The interest crediting rate is a vital feature of a cash balance plan, a defined benefit pension plan. The interest crediting rate is the rate at which the employer credits interest to the employee’s account balance in the plan.

In a cash balance plan, the employer contributes a fixed amount, or “cash balance,” to an account for each employee, which earns a guaranteed rate of return. The interest crediting rate is the rate at which this guaranteed return is credited to the employee’s account balance depending on who is eligible for cash balance plan.

The interest crediting rate is based on a formula that includes a fixed (or possibly variable) interest rate and other factors. The formula for calculating the interest crediting rate is typically set by the employer and outlined in the plan document.

It is important to note that the interest crediting rate in a cash balance plan is guaranteed, but investments can may vary from year to year based on the performance of the plan’s investments and other factors. Employees should carefully review the terms of their cash balance plan to understand the interest crediting rate and the potential impact on their retirement benefits.

Overall, the interest crediting rate is a vital feature of a cash balance plan that determines the rate of return on the employee’s account balance. It is essential for employers and employees to carefully review the terms of the plan and understand the potential impact of the interest crediting rate on their retirement benefits.

Important deadlines relating to cash balance plans

Here are several important deadlines that employers and employees should be aware of regarding cash balance plans. A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s.

Here are some key deadlines related to cash balance plans:

  1. Plan adoption deadline: Employers must adopt a cash balance plan by a certain deadline to qualify for the plan’s tax benefits. The plan adoption deadline is typically the last day of the employer’s tax year.
  2. Contribution deadline: Employers must make contributions to the cash balance plan by a certain deadline for the contributions to be tax-deductible for the current tax year. The contribution deadline is typically the last day of the employer’s tax year.
  3. Vesting schedule: The vesting schedule determines the percentage of an employee’s account balance that they are entitled to if they leave the company. Employees must meet the vesting schedule requirements to be entitled to their account balance.
  4. Retirement age: Employees must reach a certain age to be eligible to receive retirement benefits under a cash balance plan. The employer typically sets the retirement age outlined in the plan document.

Overall, it is essential for employers and employees to be aware of these deadlines and to ensure that they comply with the cash balance plan requirements. Failing to meet these deadlines can have significant consequences, including the loss of tax benefits and retirement benefits.

How is eligibility calculated?

Here is the 5-step process to determining plan eligibility:

  1. How old is the employee?

    Plans will generally be established to limit participation to employees aged 21 or older. In some cases, you can open the plan to younger employees if it makes sense for testing purposes or to balance with older employees.

    Age can impact cash balance plan contributions in many ways, including the maximum annual contribution limit, vesting schedule, and retirement benefits. Employees must carefully review the terms of their cash balance plan and consult with a qualified financial professional to understand the potential impact of their age on their retirement benefits.

  2. Determine employee start date

    Once you know the start date, this will form a basis for determining the plan entry date. As a general rule, you can exclude people who begin work in their first plan year. This would be subject to 3-year vesting. You can also set the eligibility at two years for the entrance date and then immediate vesting. Examine your employee mix and turnover to select the entrance date that works best for your company.

  3. Perform testing with combo plan

    Combining a cash balance plan with a 401(k) plan can offer several advantages for both employers and employees. For employers, the hybrid plan provides a predictable cost for funding retirement benefits and allows for customization of the plan design. For employees, the hybrid plan offers a combination of security (via the cash balance plan) and flexibility (via the 401(k) plan).

    It is important to note that cash balance 401(k) hybrid plans can be complex and subject to legal and regulatory requirements. Employers considering such a plan should seek the assistance of a qualified attorney or financial professional to ensure the plan is appropriately designed and administered.

  4. Review eligibility based on the vesting schedule

    The vesting schedule determines the percentage of an employee’s account balance that they are entitled to if they leave the company. The vesting schedule may be accelerated for employees closer to retirement age, meaning they become fully vested in their account balance more quickly.

  5. Consider amending plan design

    The plan design and pay formula for a cash balance plan must be carefully designed and approved by an actuary to comply with relevant laws and regulations. Overfunding the plan may result in the plan failing to meet these requirements, which can have negative consequences for both the employer and employees.

Final thoughts

A cash balance plan can complement your existing 401(k) plan or be a standalone retirement plan. It’s important to understand what the maximum payout amounts are and who is eligible for cash balance plan.

Cash balance plans are hybrids between defined benefit and defined contribution plans. Instead of a fixed benefit plan, they allow employees to build massive retirement assets. Because they are employer-sponsored, they are open to virtually any type of business.

It may vary depending on your age and the compensation you’ve received in your career. However, in general, a cash balance rollover is done by rolling it into an individual retirement account.

Paul Sundin

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