Cash balance plans continue to generate interest among business owners, advisors, and participants because they combine features of traditional defined benefit (DB) pensions with the familiarity of account-based retirement plans. The following frequently asked questions provide a practical overview of how cash balance plans work, how they compare to other retirement arrangements, and what key design, compliance, funding, and distribution considerations may apply.

Read the answers to your FAQs: Advisors | Employers | Participants

Common general questions about cash balance plans

What is a cash balance plan?

A cash balance plan is a hybrid DB pension plan that blends features of a traditional pension plan with the look and feel of a 401(k) plan. Cash balance plans are qualified DB plans in which contributions are made on a tax-deferred basis and are subject to all requirements of DB plans. Benefits are determined based on formulas in the plan document and grow with pay credits and interest credits. Although benefits are communicated as individual hypothetical account balances, benefits for all participants are paid from a common employer-directed trust fund.

How does the benefit in a cash balance plan grow?

In a cash balance plan, each participant’s “benefit” is tracked through a hypothetical account. That account generally receives two recurring types of credits: pay credits and interest credits.

• Pay credits may be defined as a flat dollar amount, a percentage of compensation, or a combination of both
• Interest credits may be defined as a fixed rate, a bond-based rate (such as the 10-year or 30-year Treasury), a variable rate tied to an outside index, or a “market-based” rate linked to the actual return of plan assets

Both pay credits and interest credits are generally applied for each year in which a participant earns a benefit under the terms of the plan document, generally a year in which the participant works more than 1,000 hours.

What are differences between a cash balance plan and a 401(k) plan?

A 401(k) plan is a defined contribution (DC) plan, whereas a cash balance plan is a hybrid DB plan. In a DC plan, the employer contribution is defined, such as elective deferrals, matching contributions, or profit-sharing contributions. In a DB plan, the promised benefit, i.e., the hypothetical account balance (pay credits + interest credits), is defined. What distinguishes a cash balance plan is that the “defined benefit” can be an account that behaves like a 401(k), going up and down with trust returns. This variant of a cash balance plan is known as a market based cash balance plan (MBCBP).

Cash balance plans generally allow for much higher tax-deductible contributions than a 401(k) plan, but the plan is still subject to requirements of DB plans.

Another key difference is how assets are held. In a 401(k), assets are held in individual participant accounts. In a cash balance plan, assets are held in a pooled trust. As a result, the market value of trust assets will rarely equal the total of all participants’ hypothetical account balances at any given moment. However, benefits in a cash balance plan are expressed as an individual account balance, so you always know the value of your benefit.

Cash balance plans are also subject to “preservation of capital” requirements, where a participant’s account balance at distribution cannot be less than the sum of pay credits. By contrast, a 401(k) balance depends entirely on actual investment performance and may be less than the sum of all contributions.

In addition, cash balance benefits are generally insured by the Pension Benefit Guaranty Corporation (PBGC), unless the employer qualifies for an exemption. That insurance is funded through annual premiums.

When is the deadline for adopting a cash balance plan?

Under the SECURE Act, a new cash balance plan may be adopted for a tax year up to the due date of the employer’s tax return for that year, including extensions, but no later than the 15th day of the ninth month following the end of the plan year. For example, a 2026 calendar-year plan must generally be adopted and funded no later than September 15, 2027, assuming a standard corporate extension applies.

Advisor-specific questions about cash balance plans

How do cash balance plans integrate with an existing 401(k) profit-sharing plan?

Most cash balance plans are designed to work alongside an existing 401(k) profit-sharing plan. In many cases, the cash balance plan is used to provide additional retirement benefits to participants whose desired retirement savings exceed the contribution limits available under DC plans.

Many cash balance plans are established primarily for business owners, whereas staff benefits are provided through profit-sharing contributions in the 401(k) plan. This combined design is often used to satisfy nondiscrimination testing requirements.

Who is an ideal candidate for adopting a cash balance plan?

Business owners who want to maximize retirement savings beyond 401(k) limits while reducing current tax liability may be strong candidates for a cash balance plan. That said, a cash balance plan is not a one-size-fits-all solution. Whether it is appropriate depends on the employer’s demographics, the stability of owner or partner income, and the level of benefits the employer wants to provide for staff.

What information is required to put together a proposed cash balance plan design?

To prepare a proposed plan design, it is generally necessary to collect the following information:

• Demographic information for all employees (e.g., dates of birth, dates of hire, compensation, and ownership percentages)
• Information about any retirement plans currently sponsored or previously sponsored by the employer
• How the business entity is taxed, whether as an S corporation, sole proprietorship, partnership, C corporation, or otherwise
• Desired contribution levels for owners and staff
• Whether the plan sponsor owns other businesses or is part of a controlled group or affiliated service group

What compensation is considered pensionable for business owners?

The compensation considered pensionable depends on how the entity is taxed. For entities taxed as an S corporation or C corporation, only W-2 income is generally considered pensionable compensation. For partnerships and sole proprietorships, pensionable compensation is generally self-employment income reduced by one-half of self-employment tax and reduced further by retirement plan contributions.

What are the typical investment strategies for cash balance plan assets? How does the interest crediting rate affect investment selections?

Investment strategy depends on the interest crediting design, which could be fixed, tied to bond yields, or “market-based” following the moves in trust assets.

For MBCBPs, asset allocation is driven largely by participant demographics and expected timing of lump-sum distributions. Typical equity allocations often range from 30% to 70%.

For plans using fixed interest credits (up to 6% as permitted by law) or bond-based crediting rates, investments should be selected with the interest crediting obligation in mind. This may require accepting short-term volatility and periods of underperformance relative to the crediting rate in pursuit of long-term asset growth.

What are the risks of underfunding or overfunding a cash balance plan?

Cash balance plans are subject to minimum funding requirements. Underfunding the plan may result in additional required contributions and excise taxes, and the plan may be subject to PBGC variable rate premiums. In general, plans funded below 80% may also face benefit restrictions, including limitations on lump-sum payouts. Upon plan termination, additional contributions may be required to terminate unless a majority owner waives a portion of their benefit. Overfunding the plan can trigger excise taxes upon plan termination if the value of the assets is greater than the total value of benefits under the plan. For MBCBPs, the risk of underfunding is practically nonexistent given that assets and liabilities move together by design.

What are the advantages of a cash balance plan versus a traditional DB plan?

Cash balance plans are often easier for participants to understand because benefits are expressed as account balances rather than monthly annuity amounts. Employer costs may also be more predictable because contributions are tied to pay credits. In addition, portability and distribution flexibility are often greater, since benefits are commonly paid as lump sums; this allows departing employees to roll their benefits directly into an IRA or 401(k) with minimal complexity. In an MBCBP, investment risk is mitigated for the employer because the participants bear the investment risk, which is the single biggest risk in any retirement plan.

Employer-specific questions about cash balance plans

What are some advantages of a cash balance plan from the employer perspective?

From the employer’s perspective, a cash balance plan can provide significantly increased tax deferrals and retirement savings opportunities. It can also be structured so that benefits are directed to owners and partners when tested together with nonelective DC benefits for staff.

Cash balance plans may also help attract and retain key talent by offering a valuable and understandable retirement benefit. Compared with traditional DB plans, cash balance plans are often easier for participants to understand, and employers may be able to mitigate risk with interest-crediting methodology.

What are key considerations before launching a cash balance plan at your company?

Cash balance plans are subject to minimum participation requirements.

• Generally, at least 40% of all employees, or 50 participants for companies with over 125 employees, must receive “meaningful benefits” to satisfy participation requirements
• Additional DC contributions may be necessary to satisfy nondiscrimination testing when combined with a partner-only cash balance plan
• As with any DB plan, cash balance plans must offer annuity options at distribution if the account balance exceeds certain amounts
• The plan may also be subject to annual PBGC premiums

From an employer perspective, how are cash balance plan assets invested?

In addition to the points discussed in the Advisors section related to the investment allocation, employers have fiduciary responsibilities to consider when setting the strategic asset allocation and/or hiring an investment advisor. MBCBPs tend to be the most appealing design for employers because they are not impacted when investments underperform, unlike plans that grant a guaranteed return.

What are the steps to setting up a cash balance plan?

1. You request a proposal for a cash balance plan from an actuarial consulting firm
2. Your consultant will reach out and gather the information required to prepare the proposal and will work with you on the plan design process
3. Once you decide to move forward with the cash balance plan, your consultant will prepare a statement of work/contract for your review and signature
4. Your consultant will draft your plan documents for your review and signature
5. You open and fund the trust account for the cash balance plan

How should employers communicate a cash balance plan’s benefits to employees?

Participants must receive a Summary of Plan Description (SPD) within 90 days of becoming eligible for the plan. For newly established plans, the SPD must be issued within 120 days after the later of the adoption date or the effective date.

Participants may also receive benefit statements showing the amount of benefit earned under the plan. Active participants must receive benefit statements at least once every three years.

For MBCBP with more than 30 participants, online recordkeeping is becoming increasingly common, similar to a 401(k) plan. Cash balance plans with fixed or bond-based interest credits tend to also be displayed online when there are over 30 participants, but there’s less need for regular updates because the balances are easily projected. Therefore, in some cases, even larger cash balance plans with fixed or bond-based returns will opt for quarterly benefit statements over online recordkeeping for cost efficiency.

What compliance and reporting requirements are involved in a cash balance plan?

• Form 5500 and related schedules are generally due on the last day of the seventh month after the close of the plan year, which is July 31 for a calendar-year plan. A two-and-a-half-month extension, to October 15, is available.
• PBGC filings and premium payments are generally due on the 15th day of the 10th full calendar month of the plan year, which is October 15 for a calendar-year plan.
• Forms 1099-R must be provided to any participant who received a distribution during the calendar year. These are due by January 31 following the close of the calendar year.

How is the cash balance plan insured? Is it covered by the PBGC?

The PBGC is a government agency that insures DB plans. PBGC premiums generally include both a flat-rate premium and a variable-rate premium. A plan may be exempt from PBGC coverage if it has not covered more than 25 active participants and is established and maintained by a “professional service firm,” or if it is established and maintained exclusively for substantial owners.

What is the process for terminating a cash balance plan?

For plans not covered by the PBGC, the typical termination process is:

1. Plan amendment terminating the plan.
2. A 204(h) notice must be provided to active participants at least 15 days before accruals cease.
3. A final contribution must then be made to satisfy minimum funding requirements for the year and to fund the plan to 100% of the plan termination liability (unless majority owners waive benefits).
4. Benefit election packages are distributed to participants.
5. Plan assets are distributed in lump sums or used to purchase annuities as elected.
6. Final Form 5500 must be filed.

For plans covered by the PBGC, the process is more involved:

1. Plan amendment terminating the plan.
2. A 204(h) notice must be provided to active participants at least 45 days before accruals cease, or 15 days if the plan has fewer than 100 participants.
3. A Notice of Intent to Terminate must be provided to all participants 60 to 90 days before the proposed termination date.
4. A Notice of Plan Benefits must be provided to all participants before filing Form 500.
5. Form 500 must be submitted to the PBGC by the earlier of 180 days after the proposed termination date or 60 days before any distribution.
6. After the PBGC’s 60-day review period, the plan has 180 days to distribute plan assets to all participants. If the plan sponsor has chosen to file for a determination letter, the 180-day clock starts from receipt of a favorable determination letter from the IRS.
7. A final PBGC filing and premium payment must be made before filing Form 501.
8. Form 501 is submitted after all benefits have been paid.
9. A final Form 5500 is then filed after all assets have been distributed.

If an employer has an SEP IRA, can they still have a cash balance plan?

Depending on the type of SEP IRA, an employer may still be able to have a cash balance plan. Individually designed SEPs and IRS-approved prototype SEPs allow for other retirement plans in combination. Model SEPs, which are established with Form 5305-SEP, do not allow for other retirement plans, including cash balance plans.

How flexible are cash balance plan contribution requirements from year to year?

On an annual basis, the plan’s actuary will provide a contribution range that includes the minimum required contribution and the maximum deductible contribution for the plan year. Your consultant can work with you to develop a strategy for funding your plan based on your cash flow needs.

For employers with variable income on a year-to-year basis, structuring your pay credit definition based on a percentage of pay may be an option to address cash flow requirements.

What is the annual contribution deadline for a cash balance plan?

Contributions for a plan year are due eight and one-half months after the close of that plan year. For a calendar-year plan, contributions must generally be made by September 15 of the following year.

What are the preservation of capital requirements for cash balance plans?

The preservation of capital rule requires that at distribution, participants must receive the sum of their pay credits (i.e., the cumulative return over their lifetime in the plan must be greater than 0%). This rule only applies at distribution and does not mean returns on a year-to-year basis are subject to a 0% floor.

What are the interest credit options when designing a cash balance plan?

Although the IRS has pre-approved a wide range of options for interest credits (see the table below), the top three choices are: (1) market-based, (2) fixed credits, and (3) bond-based.

What are the pay credit options when designing a cash balance plan?

Pay credits can be designed in several ways. They may be flexible so that they fluctuate as partnership units change, or they may be fixed. Fixed pay credits may take the form of a flat dollar amount, a percentage of pay, or a combination of both.

What vesting schedules are available to cash balance plan participants?

Cash balance plans must vest fully within three years. In plans designed primarily for owners or partners, benefits are often immediately vested because the partners are funding the full cost of the plan.

Participant-specific questions about cash balance plans

How is the interest crediting rate determined in a cash balance plan?

The interest crediting rate is defined in the plan document. It may be a fixed rate, a bond-based rate, or a market-based interest crediting rate (referred to as an “MBCBP”).

When can I access my benefits from the cash balance plan?

Depending on the provisions of your plan, your account balance may be available for distribution at the termination of employment, your normal retirement date, or as early as attaining age 59½ for in-service distributions.

What are advantages of a cash balance plan from the employee or participant perspective?

• Significantly increased tax-deferred retirement savings
• Easier to understand than a traditional DB plan
• Benefits are protected from creditors, as with any qualified retirement plan
• Portability and distribution flexibility, since benefits are usually paid as lump-sum distributions, allowing balances to be directly rolled over into an IRA or 401(k) with minimal complexity

What are a cash balance plan participant’s distribution options?

If your account balance exceeds $7,000, both annuity and lump-sum distribution options are available. A lump-sum distribution may be rolled over into an IRA or 401(k) to continue the deferral of taxes, subject to minimum distribution rules.

Distributions are subject to IRS rules that apply to DB plans. In particular, a distribution in a form other than a joint and survivor annuity requires notarized spousal consent.

Can participants roll over a cash balance account into an IRA or another plan?

Lump-sum distributions can be rolled over to an IRA or 401(k) (or similar arrangement such as a 403(b); it ultimately depends on whether the other employer’s plan accepts rollovers from cash balance plans.

What happens to a cash balance plan benefit if an employee leaves the company before retirement?

If the employee leaves the company before retirement, the plan may permit distribution of the vested account balance upon termination of employment, or it may require the participant to wait until normal retirement age to receive payment, depending on the plan’s provisions. Any nonvested portion of an account balance would be forfeited.

Can participants self-direct investments the way they do in a 401(k)?

No. A cash balance plan is funded through a pooled trust, and investment decisions are made at the plan level rather than individually by participants.

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Cash balance plans can be highly effective retirement and tax-planning tools when designed thoughtfully and coordinated with an employer’s broader benefits strategy. Because plan design, funding obligations, compliance requirements, and participant outcomes can vary significantly based on the facts and objectives involved, employers and advisors should evaluate these plans carefully with experienced professionals.

If you would like to explore whether a cash balance plan may be appropriate for your organization or clients, Milliman can help guide you through the analysis, design, implementation, and ongoing administration process. Reach out to us either through our website or by contacting us directly at [email protected].