Practical Law Glossary Item 3-502-9025 (Approx. 3 pages)
Glossary
Cash Balance Plan
A hybrid retirement plan that incorporates features of both defined benefit plans and defined contribution plans. While cash balance plans are defined benefit plans, they mimic the structural features of defined contribution plans since each participant's benefit is based on a hypothetical account balance which includes:
Pay credits. Calculated with an allocation formula similar to a formula used to calculate nonelective employer contributions under a defined contribution plan.
Interest credits. Calculated as either a fixed or a variable rate linked to an index such as the rate of return on a Treasury security.
No money is actually deposited into the cash balance accounts. Instead, employers make annual contributions to a pension trust fund on behalf of all participants. Plan trustees have investment control over the assets in the trust and the hypothetical accounts are credited with interest credits, not with the actual investment gains or losses experienced by the trust. If the trust assets grow at a rate greater than the promised interest credits, the plan sponsor can expect over time to make contributions less than the promised pay credits.