Cash Balance Plans with Sentinel
Each year, a participant’s account is credited with a “pay credit” and an “interest credit.” A pay credit can be a percentage of compensation, set dollar amount, or combination of both. An interest credit is either a fixed rate or variable rate that is linked to an index. The cash balance plan document will define groups of participants and their “pay credit.” At retirement, cash balance plan participants have the option to receive their account balance as an annuity for life or as a lump sum.
- Cash balance plans allow a much larger contribution than a 401(k) with profit sharing, so highly compensated employees are not only able to save for retirement but also defer state and federal income taxes while in the top tax brackets.
- Age-neutral contributions for non-owners
- Avoid lump sum swings due to interest rate shifts
- Professional groups are more able to equalize benefits
- More meaningful and understandable benefit to employee
- Tiered benefits
- Greater funding flexibility than defined contribution plans
- Converting a traditional defined benefits plan to a cash balance plan eliminates the early retirement subsidy of traditional plans
- Employers should adopt a cash balance plan with the intent of funding the plan for a moderate period of time. Generally, the IRS considers a 5-year time period sufficient to meet this rule.
- Employers bear investment risk. Because the retirement benefit is predefined, the employer must cover any shortfall that results from poor investment performance.
- Actuarial services are required as contributions to the plan are determined actuarially and are not strictly up to the employer.
- Some restrictions on lump sum payments
- Most benefits are insured by the PBGC, but insurance comes with a premium
- Do not guarantee savings for employers