Cash Balance Plan Benefits And Criteria

A cash balance plan can be a great alternative to traditional retirement savings accounts

, as these kinds of tools can help you bounce back from investment losses due to the recent recession. Also called "hybrid" plans, these savings accounts may be more beneficial than profit-sharing and 401K plans because these plans usually allow higher contribution limits. In this case, higher contributions permit a participant to save more money with larger contributions to make up for losses suffered due to lackluster economic conditions in the recent past.

Cash balance plans were introduced in 1984, although it was only in 2001 that tax reforms permitted contributions up to 60% larger than they were previously allowed. 2006's Pension Protection Act also enticed many businesses to sponsor or facilitate cash balance plans.

These retirement savings plans are also called "hybrid" plans because they combine some features of defined-benefit and defined-contribution plans. Each participant has his or her own account, the value of which is made up the individual's contributions and a rate of credit that's fixed or dependent on Treasury rates. The plan actuary manages all accounts and gives out yearly statements to workers who participate.

The fixed return rate of this type of savings plan isn't based on the performance of the plan's investments, but rather stated in the cash balance plan's documentation. Once a worker quits his or her job or gets terminated, he or she will be qualified to receive what's known as the "vested" part of the account balance, which in turn is based on the vesting schedule of the plan.

If you own a small firm or business, and want to sponsor cash balance plans as a retirement savings vehicle for your employees, you'll need to ensure that your company has a steady profit pattern, and is able to contribute more than 2% of your employees' salaries to their accounts. In addition, this type of plan is better for employers who want to make bigger contributions than what profit-sharing and 401K plans allow before taxes.

by: Carina Smith

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