Cash Balance Plan

Definition

A pension plan under which an employer credits a participant’s account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined benefit plan. In other words, the plan’s funding limits, funding requirements, and investment risk are based on defined benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

Explanation

Although the cash balance pension plan is a defined-benefit plan, it is maintained on an individual account basis. Furthermore, the cash balance plan also acts similarly to a defined-contribution plan because changes in the value of the participant’s portfolio do not affect the yearly contribution.

 

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