What is a cash balance plan?
The employees can choose two types of pension plans: defined contribution and benefit plans, which come with specific benefits for the employees after retirement. The defined benefit plan provides a lump sum of money to the employees at retirement. At the same time, the defined contribution plans a specific amount of assistance to be made by the employer toward the employee’s retirement account. In this plan, the actual amount of retirement benefits provided to an employee depends on the contribution amount, including the losses or gains of the account. You can know more about pension plans at Boca Raton cash balance pension plans.
How does a cash balance plan work?
The employee’s account is credited with a ‘pay-credit’ and an ‘interest credit’ at the end of each year in a cash balance plan. The increases and decreases in the plan’s value do not affect the promised amount directly. Thus, the employers are prone to bear the investment risks. At retirement, the employee is entitled to receive cash balance plan benefits.
How is the cash balance plan different from the traditional pension plan?
Both the plans aim to provide the employees with benefits for the whole life of an investment. But the traditional pension plan rewards the employee with benefits after monthly payments for life at the time of retirement. And on the other hand, a cash balance plan defines the benefit in terms of a stated account balance. These accounts are also referred to as “hypothetical accounts” as they fail to reflect the contribution made and are subjected to gains and losses allocable to the account.
Does the federal pension law govern the cash balance plan?
The answer to this question is yes. The federal law, along with the Employee Retirement Income Security Act (ERISA), Internal Revenue Code (IRC), and the Age Discrimination in Employment Act (ADEA), is responsible for providing certain protections for the employee benefits. When the employer offers a pension plan, these laws set fiduciary responsibility benefits accrual, participation, and funding standards. IRC also implements additional tax qualification requirements. It includes rules and regulations that mainly aim to ensure that several employees provide proportionate benefits.
Hope this information will help you draw a clear conclusion about Cash Balance Pension Plans.
