How to Design and Implement a Cash Balance Plan

The Pension Protection Act of 2006 (PPA 2006) reopened the door for a type of defined benefit plan called a cash balance plan. 

A cash balance plan is a defined benefit plan which contains a defined contribution-like accrual for some or all of the participants in the plan. Participants covered by the cash balance feature of the plan earn pay credits and interest credits which accumulate in a “hypothetical” cash balance account. When the participant leaves employment, they are entitled to the accumulation of their cash balance account, or any number of equivalent annuity options. To the participant, it looks and feels like a defined contribution plan.

The Act clarifies that cash balance accruals in a defined benefit plan are not age discriminatory. Successful litigation against cash balance plan sponsors and hesitation on the part of the IRS to endorse cash balance plan features in defined benefit plan documents scared many plan sponsors away from adopting cash balance provisions until now. Since the Act was passed, higher courts have overturned many of the prior decisions made against cash balance plan sponsors and the IRS has begun to review cash balance provisions and provide determination letters.

Learn more about cash balance plans, and how to design your own.

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Pension Plans
Pension Plans

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