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Cash Balance Plan: A Unique Blend of Defined Benefit and Contribution Features
Definition & Meaning
A cash balance plan is a type of retirement plan that combines features of both defined benefit and defined contribution plans. In this plan, each participant has a hypothetical account that grows based on a formula that includes contributions and interest credits. Unlike traditional defined benefit plans, which provide a specific monthly benefit at retirement, cash balance plans state the benefit in terms of a hypothetical account balance. This means that participants can see their balance grow over time, albeit the actual payout may differ based on the plan's terms.
Table of content
Legal Use & context
Cash balance plans are primarily used in the context of retirement planning and employee benefits. They fall under the legal framework of employee retirement income security, which governs how retirement plans are structured and managed. Legal professionals may encounter cash balance plans in various contexts, including corporate law, employment law, and tax law. Users can manage their retirement planning using legal templates provided by US Legal Forms, which can help in drafting or reviewing plan documents.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: An employee at a manufacturing company participates in a cash balance plan. Each year, the company credits their account with a percentage of their salary, along with interest based on a fixed rate. When the employee retires, they can choose to receive their balance as a lump sum or as monthly payments for life.
Example 2: A tech firm offers a cash balance plan to its employees, allowing them to see their hypothetical account grow annually. This plan helps attract talent by providing a clear understanding of retirement benefits. (hypothetical example)
Relevant laws & statutes
The primary law governing cash balance plans is the Employee Retirement Income Security Act (ERISA), which sets standards for pension plans in the private sector. Additionally, case law such as Drutis v. Rand McNally & Co. (2007) clarifies the classification and requirements of cash balance plans.
State-by-state differences
State
Key Differences
California
Specific regulations regarding interest crediting rates.
New York
Additional disclosure requirements for plan participants.
Texas
State tax implications for cash balance plan distributions.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Defined Benefit Plan
A retirement plan that pays a specified monthly benefit at retirement.
Cash balance plans show a hypothetical account balance rather than a fixed monthly benefit.
Defined Contribution Plan
A retirement plan where contributions are made by the employee, employer, or both.
Cash balance plans guarantee a return on contributions, while defined contribution plans do not.
Common misunderstandings
What to do if this term applies to you
If you are considering participating in a cash balance plan, review the plan documents carefully to understand how benefits are calculated and what options are available at retirement. You may also want to consult with a financial advisor or legal professional to ensure the plan meets your retirement goals. For assistance, explore US Legal Forms' templates for retirement plans to help you navigate the process effectively.
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Type: Defined benefit plan with a hypothetical account.
Interest Credits: Varies by plan, often fixed or based on market rates.
Mandatory Payments: Must offer lifetime payment options.
Compliance: Subject to ERISA regulations.
Key takeaways
Frequently asked questions
A cash balance plan is a retirement plan that provides a hypothetical account balance, combining features of both defined benefit and defined contribution plans.
Benefits are calculated based on a formula that includes contributions and interest credits added to the hypothetical account.
Yes, cash balance plans are governed by the Employee Retirement Income Security Act (ERISA).
Many plans allow participants to choose between a lump sum payment or a series of payments for life upon retirement.