Cash balance plan

What a cash balance plan is

Each year the plan credits a participant’s hypothetical account with a pay credit, such as 5% of pay, and an interest credit at a fixed or indexed rate. The account is a bookkeeping record. Plan assets are pooled, the employer makes the investment decisions and bears the investment risk, and an actuary certifies the required funding each year. Most cash balance plans are insured by the Pension Benefit Guaranty Corporation.

Why it matters to employers

Because the legal limit applies to the benefit, not to annual contributions, a cash balance plan can let older owners and partners put away far more than a 401(k) allows. In 2026 the limit is an annual benefit of $290,000 at retirement. Many employers pair one with a 401(k) profit sharing plan. The trade-off is commitment: contributions are required each year, and the plan needs an actuary.

Example

A plan credits each participant 5% of pay plus 4% interest a year. An employee earning $80,000 with a $20,000 opening balance receives a $4,000 pay credit and an $800 interest credit, whatever the plan’s investments earned that year.

Common mistakes

• Treating contributions as optional. Minimum funding rules apply every year.

• Telling participants they choose their investments. They do not.

• Forgetting that the cash balance plan and the 401(k) are tested together for coverage and nondiscrimination, and share a combined deduction limit.