The Ultimate Guide to Cash Balance Plans

Cash Balance Plans are one of the most popular plans in the retirement space. Whether you have experience with these plans or are a newbie, we have the tips that will help you structure a plan.

Cash balance plans were considered extinct or on the verge of extinction just a few years ago until the Pension Protection Act of 2006, shading light on what cash balance plan needed to get IRS approval. Business owners must ensure that a cash balance plan is a success and meets the standards required by IRS.

Business owners mainly use cash balance plans to maximize their contributions and retain employees loyal and dedicated to their company. But IRS requires that a plan should meet the non-discriminatory test. A plan should not only benefit a small group of employees. So how can a business owner achieve what he wants while staying within the IRS rules?

Take a look at our answers to your cash balance plan FAQs and then feel free to dig a little deeper below.

New to cash balance plans? Download our Cash Plan Plan Guide


We’ve divided our cash balance plan information into seven categories. Click on the category below that interests you, or simply scroll down for a full list of our articles and posts.

Plan design and structuring

This article provides ten critical steps an employer can take to ensure the sustainability of a cash balance plan.

Compliance and governance documentationDefined responsibilities, benchmarking, administrative practices, and legislative and regulatory changes help quick decision-making in a defined benefit plan management.
A plan design that supports defined benefit plan philosophyEfficient use of investment and encouraging retirement when the milestone is achieved. Constant evaluation should ensure that the defined benefit plan stays relevant over its course.
Good administrationThe plan sponsor should collect and use quality data necessary to forecast the financial impact and how changes may affect the plan.
Enhanced communicationCommunication ensures that participants understand and appreciate the value of their defined benefit plan.
Periodic review of assumptionsPlans are based on assumptions that should be reviewed periodically to accommodate the plan’s factors. Market conditions, plan experience, and legislative and regulatory changes affect plan effectiveness.

These articles discuss some of the general concepts of how the plans work. Use them to gain an understanding of plan basics and structuring ideas.

Tax related issues

Let’s look at some of the advantages:

  • Businesses will typically be able to contribute and deduct more than in a defined contribution plan.
  • Contributions can be made subsequent to year-end and still take a tax deduction for the prior year (as long as they are made before the tax return is filed)
  • For older self-employed individuals, the plan allows substantial contributions and provide a means of getting large contributions over a small period of time.
  • They can be combined with other qualified plans, such as 401k and profit sharing plans.
  • They can be established for owner only business or large companies.
  • Participant loans are allowed.
  • There are no set contribution limits. Deduction limitations are calculated by an actuary.
  • Benefits are not based on asset returns.  Therefore, it minimizes risk to the employees.

The #1 reason that business owners set up these plans is to defer taxes. The posts below will explain to to best structure the plans for tax purposes.

Companies best suited for cash balance plans

Cash balance plans aren’t for everyone. In the posts below, we will show you what types of companies are best suited for these plans.

Cash balance plans also allow for portability. If an employee decides to quit the company, they can take their vested assets to another plan or roll them into an IRA. The employer also enjoys some form of flexibility under a cash balance plan. He can choose who to contribute to and how much to contribute to their accounts, subject to IRS nondiscrimination rules.

The employer has to include a considerable number of employees in the cash balance plan and contribute about 5 to 8 % for employees to pass the nondiscrimination rules.

However, a cash balance plan may not be the right choice for all companies. First, the cash balance plan is funded annually. Companies should have a constant cash flow to enable them if fund the plan for the given period. Employers also have to make a minimum of 5% contribution under the cash balance plan compared to 3% under 401 (k).


There are some tips you can use to get the plan structured correctly. Let’s take a look at some of the strategies that you can implement to get the most of a plan.

Do employees contribute to a cash balance plan? No, they do not. Cash balance plans do not allow employee deferrals. The company solely makes contributions. The company needs to ensure adequate funds to contribute to all qualifying employees. If employees are looking for an additional way to contribute, they will need to do an employee deferral on a 401k plan.

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Custodians and Investments

The plan assets are pooled together and typically invested by an investment manager. This is at the direction of the trustee. If the plan’s investment income and gains exceed the guaranteed rate, the employer will utilize the excess to reduce future contributions. However, this will not impact any amount credited to the participant’s accounts.

Once your plan is set up you need to use an investment platform. Here is some information regarding the custodians and advisors that we work with.

  • The selection of investments for participant-directed 401(k) plans requires that the officers or committee members answer the following questions:
  • Is each investment option prudent and suitable for the participants?
  • Do the funds, in total, constitute a diversity of investment options?
  • Is the investment package suitable for the abilities of the particular workforce–or, if not, can it be made so through offering investment education or advice to the participants?
  • Fiduciaries must monitor the funds and remove any funds that don’t perform well. Some investment providers (such as insurance companies, mutual fund companies, and banks) help fiduciaries by giving them performance, expense, benchmarks, and other information and removing underperforming funds from their investment packages.
  • Other advisors, such as investment consultants, can help the fiduciaries evaluate the participants’ investments.

Advanced topics

Do you understand the basics? Well then let’s move on to some more advanced topics.

ERISA imposes several disclosure and reporting requirements on cash balance plans. For example, companies must file an annual report, Form 5500, with the IRS and DOL. In addition, employees must be given summary plan descriptions (SPDs), statements of material modifications, and summary annual reports (SARs) at specified times.

Participants must be given information about their benefits upon request, and if the plan wants 404(c) fiduciary protection, participants are entitled to detailed information about the plan and its investments. An ERISA fidelity bond must be obtained, and, in some circumstances, a plan must be audited annually by an independent CPA.

Small employers can’t know these rules. As a result, plan sponsors need help complying with the reporting and disclosure requirements.


If you just want to watch videos, that is fine. Take a look at some of the videos that we have below.

So there you have it! Our ultimate guide to cash balance plans.

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