How do cash balance plans differ from traditional pension plans?
While both traditional defined benefit plans and cash balance plans are required to offer payment of an employees benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.
While both traditional defined benefit plans and cash balance plans are required to offer payment of an employees benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.
DOL Response: While both traditional defined benefit plans and cash balance plans are required to offer payment of an employees benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. These accounts are often referred to as hypothetical accounts because they do not reflect actual contributions to an account or actual gains and losses allocable to the account. Comment by the RLR&C ERISA attorneys: Because of the controversy surrounding conversion to cash balances plans, we are providing a series of DOL questions and answers from their website concerning cash balance plans. These tips form a predicate for understanding the complex issues facing the DOL with respect to cash balance plans, including age discrimination and cut back in accrued benefits. View all Tips © 2009 Reish Luftman R
