What is a Cash Balance Plan?

A cash balance plan is a type of retirement benefit plan offered by employers. It combines features of both defined benefit and defined contribution plans, providing employees with a predetermined benefit at retirement age. Unlike traditional pension plans, cash balance plans provide individual accounts for each participant, similar to a 401(k) plan.

How do Cash Balance Plans Work?

In a cash balance plan, employers contribute a set percentage of an employee's salary or a flat dollar amount to their individual account each year. These contributions earn interest or investment credits, typically based on a predetermined rate or index. Over time, the account balance grows as the contributions and credits accumulate. Upon retirement or termination, employees can receive the accumulated balance as a lump sum or opt for regular annuity payments.

Differences from Traditional Pension Plans:

Cash balance plans differ from traditional pension plans in several ways. Firstly, instead of calculating benefits based on years of service and final average salary, cash balance plans provide a clear account balance statement for participants. This makes it easier for employees to track their retirement savings progress.


Secondly, while traditional pension plans rely on the employer's assets, cash balance plans allocate funds to individual participant accounts. This means that the account balance is portable if the employee changes jobs, offering more flexibility and control over retirement savings.

Differences from 401(k) Plans

While cash balance plans share similarities with 401(k) plans, they also have key differences. Both plans allow for employer contributions, but cash balance plans guarantee a stated benefit at retirement, whereas 401(k) plans depend on investment performance.

Additionally, cash balance plans typically have higher contribution limits than 401(k) plans, enabling employees to accumulate larger retirement savings within the plan.

Federal Pension Laws and Conversion Requirements

Cash balance plans are governed by federal pension laws, including the Employee Retirement Income Security Act (ERISA). These laws protect employees' rights by ensuring that their retirement benefits are properly funded and managed.


If your employer converts your current plan to a cash balance plan, certain requirements may apply. Employers must provide notice of the conversion and communicate any changes in the plan's structure or benefits. It is essential to review these changes carefully and seek professional guidance if needed to understand the impact on your retirement savings strategy.