Cash Balance Plans
A Cash Balance plan is a type of IRS-qualified retirement plan known as a “hybrid” plan. In a Cash Balance plan, each participant has an account that grows annually in two ways: first, an employer contribution and second, an interest credit, which is guaranteed rather than dependent on the plan’s investment performance. The employer contribution is determined by a formula specified in the plan document. It can be a percentage of pay or a flat dollar amount. The annual interest credit is guaranteed and is not dependent on the plan’s investment performance. The interest credit for smaller plans is usually a fixed rate of return of 4% and for some larger plans, an actual rate of return (ARR) may be appropriate. When participants terminate employment, they are eligible to receive the vested portion of their account balance. An employer can offer a combination of qualified retirement plans in order to produce a larger contribution. In fact, in most cases, a 401(k) Profit Sharing plan in conjunction with a Cash Balance plan is necessary to produce the desired owner and employee contributions.
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