The basics
How a Cash Balance plan works
A Cash Balance plan shows each participant an account balance, like a 401(k). Underneath, it is a defined benefit plan, which operate under very different rules, described in this guide.
The account that isn't really an account
Every participant gets a statement showing an account balance. That balance is a bookkeeping record of what the plan owes them. It is NOT a separate brokerage account in their name.
The balance grows two ways:
- Pay credits. The plan document sets a credit for each participant every year. It can be a percentage of pay (say 5% of pay) or a flat dollar amount (say $150,000), and it can differ by group, such as owners and staff.
- Interest credits. The whole balance is credited with interest at a rate the plan document sets, such as a fixed 5% or a variable rate tied to some measure of market based returns. See Interest crediting rates.
- Year 1: Pay credit
- $150,000
- Year 2: $150,000 × 1.05 + $150,000
- $307,500
- Year 3: $307,500 × 1.05 + $150,000
- $472,875
- Account balance after 3 years
- $472,875
Why it is a defined benefit plan
The account balance is a promise, a benefit defined by the plan formula. The plan owes the participant that balance no matter how the actual investments perform (for fixed interest crediting plans, which is our recommendation). Because the benefit is defined in advance, the law treats a Cash Balance plan as a defined benefit plan, with these consequences:
- One pooled trust. All contributions go into a single trust and are invested together, usually with the owner as trustee.
- The employer bears the risk. If investments earn more than the interest credits, future minimum required contributions will generally go down, eventually to $0. If they earn less, the employer makes up the difference over time. See Investments and risk.
- An actuary sets the contribution. Each year an enrolled actuary values the plan and certifies a minimum required and a maximum deductible contribution. See The contribution range.
- A lifetime limit applies. Benefits are capped by IRC section 415(b) rather than by an annual contribution limit. See Lifetime limit. However, an annual maximum deductible contribution, determined by the actuary, does apply.
Cash Balance and 401(k), side by side
| Cash Balance plan | 401(k) plan | |
|---|---|---|
| Who contributes | Employer only | Employees and employer |
| Annual limit | Determined by the actuary; can be several hundred thousand dollars | $72,000 in 2026, plus catch-up for age 50+ |
| Lifetime limit | Yes, under 415(b) | No |
| Investment risk | Employer (with a fixed interest credit design) | Participant |
| Participant sees | Account balance | Account balance |
| Vesting | 3 years or faster | Up to 6-year graded for employer money |
| Annual actuarial certification | Yes (Schedule SB) | No |
Who must be insured by the PBGC
Many defined benefit plans pay premiums to the Pension Benefit Guaranty Corporation (a government body that insures some pension plans in case of bankruptcy of the sponsor). Plans that cover only owners are exempt, and so are plans of professional service employers (doctors, lawyers, accountants and similar) that have never had more than 25 active participants. Most small Cash Balance plans fall into one of those groups.