Cash Balance & Defined Benefit Plans
Cash Balance and Defined Benefit Plans offer powerful retirement solutions for business owners and high-income earners seeking to maximize contributions and secure predictable retirement income. While both fall under the category of defined benefit plans, traditional Defined Benefit Plans provide a fixed, formula-based payout at retirement, whereas Cash Balance Plans offer a more flexible, account-style structure with high contribution limits and tax advantages.
Defined Benefit Plans
Defined Benefit Plans, commonly referred to as traditional pension plans, promise a specified retirement benefit—usually based on a formula that includes salary history, years of service, and age. Unlike defined contribution plans, the employer is responsible for funding the plan and ensuring it is adequately funded to meet the promised retirement benefit.
These plans are ideal for business owners and key employees seeking to maximize retirement contributions and secure predictable income in retirement. Contributions are actuarially determined and often significantly higher than those allowed under defined contribution plans, making Defined Benefit Plans especially attractive for those nearing retirement age and seeking to catch up on retirement savings.
Defined Benefit Plans are subject to strict IRS funding requirements and annual actuarial valuations, but they can be a powerful tool for long-term retirement planning and tax deferral.
Cash Balance Plans
Cash Balance Plans are a type of Defined Benefit Plan that operates with features similar to a Defined Contribution Plan, offering the best of both worlds. Each participant has a hypothetical account that grows annually with employer contributions and an interest credit, as defined in the plan.
While technically a defined benefit plan, the structure of a Cash Balance Plan is more intuitive for participants, as they can see a clearly stated account balance and benefit accrual. These plans are often used in combination with a 401(k)/Profit Sharing Plan to maximize retirement contributions and tax efficiency.
Cash Balance Plans are particularly well-suited for business owners, partners in professional firms, or high-income earners who want to make large tax-deferred contributions—often well above the limits of a 401(k) or Profit Sharing Plan.
As with traditional pension plans, Cash Balance Plans require actuarial oversight and must meet minimum funding standards, but their flexibility and high contribution limits make them a powerful retirement planning tool.
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