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Cash Balance Plans While technically a defined benefit plan, a cash balance plan is actually a hybrid plan. In a cash balance plan, the employer credits the participant's account with a "pay credit" (such as 5% of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer but are manageable through the design of the plan. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an accumulated account balance. For example, assume that a participant has an account balance of $200,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity. The annuity payment amount would be calculated based on actuarial factors. In many cash balance plans the participant is able to elect (with consent from his or her spouse) to take a single sum benefit equal to the $200,000 account balance. In addition to generally permitting participants to take their benefits as a single sum payment at retirement, cash balance plans often permit vested participants to choose (with consent from their spouses) to receive their accrued benefits in a single sum payment if they terminate employment prior to retirement age. |
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