How Long Do You Have to Fund a Cash Balance Plan? Complete Guide

Cash balance plans have gained popularity as retirement savings options for businesses of all sizes. These hybrid plans combine elements of both defined benefit and defined contribution plans, offering participants a guaranteed interest credit on their account balance.

One crucial aspect of managing a cash balance plan is understanding the timeline for funding the plan. Have long you have to fund the plan is a critical step.

In this article, we will explore the factors influencing the funding timeline for a cash balance plan and the considerations involved. Let’s jump in!

Looking to Get $100,000+ Into Retirement?

We'll show you the #1 tax and retirement strategy!

Quick Links:

How Long Do You Have to Fund a Cash Balance Plan?

Cash balance plans have very complex funding requirements. Each year plan is open. You would have a minimum, maximum, and target funding contribution.

There really is no specification required time to have a plan open. The IRS says they should be open for at least several years. In addition, you should set up a plan with long-term intent.

Many people say a plan should be open for three or five years. But since there’s no established timeframe, UN theory can shut it down after a year if you have a valid reason to do so.

Please don’t go into a plan assuming you can fund it for one year and shut it down. These are ongoing long-term plans; you should have them for at least several years.

Funding Obligations and Assumptions

Cash balance plans require employers to make annual contributions to fund the plan. The contribution amount is determined based on a formula specified in the plan document. This formula typically involves a percentage of the participant’s compensation, often expressed as a flat dollar amount or a percentage of salary. The employer must contribute the required amount by the plan’s specified due date to maintain compliance with regulatory guidelines.

Like defined benefit plans, cash balance plans require actuarial calculations to determine the funding obligations. Actuaries use various assumptions, such as interest rate expectations, salary growth, and mortality rates, to project future benefit obligations. These calculations help determine the annual contributions needed to fund the plan adequately and meet the promised benefits.

Cash balance plans offer flexibility in contribution design, allowing employers to consider age-weighted contributions. This feature will enable employers to contribute more to older participants, acknowledging their shorter time horizon until retirement. By doing so, employers can meet regulatory requirements while maximizing contributions for older employees.

Contribution Timing

The timing of contributions is an essential consideration in funding a cash balance plan. Employers have flexibility in deciding when to make contributions throughout the plan year. However, contributions must be made within the plan year to maintain compliance. Some employers make regular contributions throughout the year, while others may make lump-sum contributions towards the plan year’s end.

Cash balance plans often include a vesting schedule, determining when participants become entitled to employer contributions. Vesting schedules can vary, but they typically provide gradual vesting over the years, ensuring that employees who stay with the company for an extended period receive the full benefit of the employer contributions. The vesting schedule influences the timeline for fully funding the plan as it determines the point at which participants are entitled to their accumulated benefits.

Plan Termination or Conversion

In certain situations, employers may terminate or convert a cash balance plan. When a plan is terminated, the employer must fund the participants’ accumulated benefits in the plan. The timeline for funding a plan termination depends on regulatory requirements and can vary. Similarly, if a cash balance plan is converted to another type of retirement plan, such as a defined contribution plan, the timeline for funding the new plan will depend on the specifics of the conversion process.

Funding a cash balance plan involves complying with various regulatory guidelines. These guidelines ensure that the plan meets minimum funding requirements and remains in line with legal and tax regulations. Employers must stay updated on regulation changes and adjust their funding strategies accordingly to maintain compliance and avoid penalties or plan disqualification.

Bottom line

Funding a cash balance plan requires employers to understand the annual funding obligations, actuarial calculations, age-weighted contribution considerations, and the timing of contributions. The timeline for funding a cash balance plan can be flexible, allowing employers to choose the contribution timing that best suits their financial circumstances.

Compliance with regulatory guidelines is crucial to ensure the plan’s sustainability and to provide participants with the promised retirement benefits. Employers can maximize the benefits of cash balance plans and support by effectively managing the funding timeline.

Paul Sundin

Get a FREE 30 Minute Consultation

Reach out to us today and we'll show you our favorite strategies! We can show you how to structure a plan for maximum tax benefit and provide you with a custom plan design.

Leave a Comment