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Combining a Cash Balance Plan with a 401(k) provides exceptional leverage for the highly compensated to accelerate retirement contributions while enhancing retirement savings for their employees. The level of tax-deductible contributions is based on several factors including age, income, and company census. In most cases the benefits can be significantly higher than a 401(k) profit sharing plan alone. While a large portion of these benefits may be dedicated to business owners and the highly compensated, all employees will enjoy enhanced retirement savings making the Cash Balance Plan an attractive addition to a benefit package.

If you are frustrated by the deductible caps of a standard 401(k) then Cash Balance may be an attractive alternative.


A Cash Balance Plan is a corporate sponsored retirement plan that combines many of the characteristics of the two most common retirement structures, defined benefit pension plans and defined contribution 401(k) plans. In a defined contribution 401(k) plan the retirement benefit is the balance of an employee’s account based on contributions made by the employee and employer as well as investment earnings. In a defined benefit pension account the benefit is normally structured as a specific lifetime income stream. The benefit is promised by the company and the employer makes all of the contributions to sustain the distributions.

Cash Balance plan is a defined benefit plan that defines the benefit as a stated account balance similar to a 401(k). This structure is more appealing to employers because the contributions are well-defined. It is more appealing to employees because the value of the benefit is easily determined (like a 401(k)) and it is often portable to future employers once vesting has been satisfied.


In a cash balance plan, each participant is credited with a percent of their annual compensation referred to as a “pay credit”. The pay credits also earn an annual “interest credit” such as the return on the 30 year U.S. Treasury bond. Each year the employer funds the plan based on the plan design and actuarial calculations. The funding is deposited in a trustee managed account. In a cash balance plan the amount awarded each employee annually is based on the pay and interest credit. Increases and decreases in the value of the plan’s investments do not directly affect an employee’s promised benefit.

Below is an illustration for an employee earning $40,000 a year with a 5% pay credit and an interest credit of 5% that is pegged to the long Treasury bond.

	Pay Credit	Interest Credit	Total Account Value
End of Year 1: ($40,000 x 5%)	$2,000	$0	$2,000
End of Year 2: ($40,000 x 5%)	$2,000	$100 ($2,000 x 5%)	$4,100

Cash Balance Plans often provide attractive distribution features for employees that differ from traditional defined benefit plans. For example, an employee that terminates employment prior to retirement generally is permitted to roll the account balance into a qualified Individual Retirement Account (IRA) or to a new employer’s qualified plan.