In a cash balance plan, each participant is credited with a percent of their annual compensation referred to as a “pay credit”. The pay credits also earn an annual “interest credit” such as the return on the 30 year U.S. Treasury bond. Each year the employer funds the plan based on the plan design and actuarial calculations. The funding is deposited in a trustee managed account. In a cash balance plan the amount awarded each employee annually is based on the pay and interest credit. Increases and decreases in the value of the plan’s investments do not directly affect an employee’s promised benefit.
Cash Balance Plans often provide attractive distribution features for employees that differ from traditional defined benefit plans. For example, an employee that terminates employment prior to retirement generally is permitted to roll the account balance into a qualified Individual Retirement Account (IRA) or to a new employer’s qualified plan.