Q&A on Cash Balance plans

What is a Cash Balance Plan?

A Cash Balance Plan is a type of defined benefit plan that operates in ways similar to a Profit Sharing plan. A participant’s account grows annually in two ways: first, a contribution and second, an interest credit. This interest credit is set annually. The interest credit becomes the target return objective to manage the portfolio. Whether or not the target return is acheived, the intereset credit is guaranteed by the paying ability of the plan sponsor.

Must everyone participate equally in the Cash Balance Plan?

No. Employers can designate different contribution amounts for participants. The amount can be a percentage of pay or a flat dollar amount.

Can Cash Balance contributions change over time?

The short answer is yes, but with restrictions. Cash Balance Plans can be amended periodically to permit different contribution levels, but there are some limitations.

How are investments handled?

Plan assets are pooled and invested by the trustee or investment manager. The accounts of the participants will be credited with interest at a rate guaranteed by the plan regardless of the actual investment return.

Who benefits from Cash Balance Plans?

Those who want to contribute more than $49,000, tax-deferred, to a qualified plan, and those who need to catch-up on their retirement savings.


Cash Balance Plans are more complex than traditional 401(k) plans and may not be right for everyone. However, for some business owners or professional partners, it is a significant way that may potentially decrease their tax burden and accelerate their savings within a tax-qualified plan.