How is a Cash Balance Plan like a DC Plan?
One of the principle differences between a traditional DB Plan and a Cash Balance Plan is that the Cash Balance Plan appears to participants to be very similar to a DC Plan (such as a Profit Sharing Plan). For a Cash Balance Plan, annual contributions are credited to a “hypothetical account” for each participant, and a specific interest rate is credited to that account. Participant statements are structured like statements for a DC Plan, and include the following items: • Beginning balance • Contribution credits • Interest credits • Ending balance “Contribution credits” are usually defined as either a percentage of that year’s compensation, or a flat dollar amount. “Interest credits” are based on an index or an amount defined in the plan (but must conform to IRS regulations). Distributions generally agree with the participant’s hypothetical account balance at the time of distribution. This allows participants to have a better understanding of the value of their retirement account than
