In the United States, cash balance plans are a type of defined benefit retirement plan that provide a guaranteed retirement benefit to employees. These plans are becoming increasingly popular among employers as they offer a hybrid approach that combines features of both defined benefit and defined contribution plans. While the employer is primarily responsible for funding the plan, employees may also have the option to make contributions.
Understanding Cash Balance Plans
Cash balance plans are designed to provide a predetermined benefit to employees upon retirement. The benefit is typically based on a percentage of the employee’s average salary over a specified period of time, with adjustments for factors such as age and years of service. Unlike traditional pension plans, cash balance plans express the benefit as an account balance, similar to a 401(k) plan.
Employer Contributions
- Eligible Employers
Any employer, including corporations, partnerships, sole proprietors, and non-profit organizations, can establish a cash balance plan. There are no specific restrictions on the type or size of the employer.
- Employer Contribution Limits
Employers are responsible for making contributions to the cash balance plan on behalf of their employees. The contribution limits for cash balance plans are determined by various factors, including the employee’s age and compensation level. The Internal Revenue Service (IRS) sets limits on the maximum annual contribution that can be made to a cash balance plan.
Employee Contributions
- Eligible Employees
While employer contributions are the primary source of funding for cash balance plans, some plans may allow employees to make voluntary contributions. However, it is important to note that employee contributions are not a common feature of cash balance plans, and their availability is at the discretion of the employer.
- Employee Contribution Limits
If employee contributions are allowed, the limits are typically set by the employer and must comply with the overall contribution limits imposed by the IRS for defined benefit plans.
Combination Contributions
In some cases, cash balance plans may allow a combination of employer and employee contributions. This means that both the employer and the employee can contribute to the plan, up to the applicable contribution limits. However, it is important to note that combination contributions are not a standard feature of cash balance plans and may vary depending on the specific plan design.
Age and Service Requirements
- Minimum Age Requirement
Cash balance plans may impose a minimum age requirement for employees to participate. This requirement can vary depending on the plan, but it is typically set at 21 years or older.
- Service Requirement
Cash balance plans may also have a service requirement, which means that employees must work for a certain period of time before becoming eligible to participate in the plan. The service requirement can vary, but it is commonly set at one year of service.
Non-Discrimination Testing
Cash balance plans, like other retirement plans, must satisfy non-discrimination testing requirements to ensure that the benefits provided do not favour highly compensated employees. These tests are conducted by the IRS and are designed to ensure that the plan does not unfairly benefit key employees or discriminate against rank-and-file employees.
Legal Restrictions and Regulations
- ERISA Compliance
Cash balance plans are subject to the Employee Retirement Income Security Act (ERISA), which sets standards for the operation and administration of employee benefit plans. Compliance with ERISA regulations is crucial to ensure the plan’s legal and fiduciary responsibilities are met.
- IRS Regulations
Cash balance plans must also comply with various IRS regulations, including those related to contribution limits, plan design, vesting requirements, and reporting obligations. Failure to comply with IRS regulations can result in penalties and potential disqualification of the plan.
Conclusion
Cash balance plans in the USA provide employers with a flexible retirement plan option that combines elements of defined benefit and defined contribution plans. While employer contributions are the primary source of funding, some plans may allow employee contributions. Eligibility requirements, contribution limits, and plan design can vary, and it is important for employers and employees to consult with qualified professionals to understand the specific rules and regulations that apply to their cash balance plan.
