A Cash Balance Plan is a corporate sponsored retirement plan that combines many of the characteristics of the two most common retirement structures, defined benefit pension plans and defined contribution 401(k) plans. In a defined contribution 401(k) plan the retirement benefit is the balance of an employee’s account based on contributions made by the employee and employer as well as investment earnings. In a defined benefit pension account the benefit is normally structured as a specific lifetime income stream. The benefit is promised by the company and the employer makes all of the contributions to sustain the distributions.
Cash Balance plan is a defined benefit plan that defines the benefit as a stated account balance similar to a 401(k). This structure is more appealing to employers because the contributions are well-defined. It is more appealing to employees because the value of the benefit is easily determined (like a 401(k)) and it is often portable to future employers once vesting has been satisfied.