Cash Balance Plans |
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Cash Balance Plans fall under the category of
defined benefits plans, however operate like defined
contribution plans (401(k), profit sharing plan...) in certain
regards. Each participant has credited to his "Cash Balance
Account" on an annual basis both a pay related credit as well as
an investment credit. The pay related credit is a percentage of
total wages for the year and the investment credit is interest
credited based on some well defined index.
- The defined contribution plan limitations are not
applicable to Cash Balance Plans (though other limitations
may exist). In addition a company can sponsor both a
defined contribution plan (401(k), profit sharing...) and a
Cash Balance Plan.
- Some other advantages of Cash Balance Plans over
traditional defined benefits plans are the ease of
understanding and the ability to usually provide the same
pay related credit rate to all non key employees, regardless
of age. As is true with a traditional defined benefits
plan, if the key employees are older than most of the staff,
a Cash Balance Plan can be designed that can provide very
significant benefits to a select group of key employees with
a reasonable level of benefits to other employees.
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