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Cash Balance Plan

Key Features

  • Contributions may be made in stock
  • May be used to buy out owners of a business

A cash balance plan is a type of defined benefit plan that defines the promised benefit in terms of a stated account balance. A participant’s account increases each year based on “pay credits” (such as a percentage of compensation) and “interest credits”. However, changes in the plan investments do not directly affect a participant’s promised benefit.

Many people feel that cash balance plans are easier for employees to understand than traditional defined benefit plans because the benefits are reported as account balances rather than accrued benefits. However, they can be confusing when the payout of benefits does not directly correspond to the “hypothetical’ balances reported. In most instances, the same benefits can be provided using either a traditional defined benefit plan or a cash balance plan.

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