Find a Powerful Solution With a Cash Balance Defined Benefit Plan

Many business owners wish they could have the best of both worlds with their retirement plan, combining the guaranteed benefit, large contribution limits and tax deduction provided by a defined benefit plan with the flexibility of a defined contribution plan. The solution may be a type of defined benefit plan referred to as a cash balance plan.

The plan is easier to communicate than a traditional defined benefit plan because benefits are presented to participants as a hypothetical account balance.

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How a Cash Balance Defined Benefit Plan Works

The plan provides benefits to participants in the form of hypothetical account balances normally stated as a dollar amount or a percentage of compensation.

Each year, eligible participants receive their benefit in the form of a pay credit and an interest credit that is added to their hypothetical account. However, the plan is still funded like a traditional defined benefit plan with funds going into a pooled account.
The cash balance defined benefit plan formula considers salary only. As a result, it can be designed to equalize the contribution for owners or highly compensated employees with the same compensation, but different ages.
Cash balance plans may be funded with, but are not limited to, life insurance and annuity contracts.

Advantages of a Cash Balance Defined Benefit Plan for Your Business

Tax deductions for your business
Retirement benefits are guaranteed, provided annual funding is made
Can help attract and retain employees
Higher benefit and contribution limits compared to 401(k) and Profit Sharing Plans
May offer larger contribution amounts than a traditional defined benefit plan
Larger contributions allowed for older participants
Portable: The employee’s vested benefit is paid out at termination or retirement.

Points to Consider About a Cash Balance Defined Benefit Plan

Annual contributions are required.
Adequate cash flow is necessary to fund the contribution.
Employee demographics impact the contribution. These plans work well for older owners with younger employees.
Unless funded with insurance products, the employer bears the investment risk.
Participant loans are not permitted.

What You Need to Know About Cash Balance Defined Benefit Plans

Read through our information guide to get all the details about Cash Balance Defined Benefit Plans.

Cash Balance Defined Benefit Plan Information Guide (PDF)

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IMPORTANT DISCLOSURES

The Lafayette Life Insurance Company does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Lafayette Life cannot guarantee that the information herein is accurate, complete, or timely Lafayette Life makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.

The Lafayette Life Insurance Company provides services to pension plans as outlined in a separate Administrative Services Agreement, and issues life insurance and annuity products that may be used as funding options. This material is for informational purposes only. Lafayette Life does not serve as plan administrator or fiduciary, nor does Lafayette Life or its representatives provide ERISA, legal or tax advice. Your personal or legal tax advisors should always be consulted and relied upon for advice.