Characteristics Of A Cash Balance Plan

A cash balance plan is a defined benefit plan, often referred to as a hybrid plan, since it has some of the characteristics of a defined contribution plan (IRS, 2016). In the article, “A Review of Defined Benefit, Defined Contribution, and Alternative Retirement Plans” (2012), this plan there is a promised benefit in terms of ending account balance, have higher annual contributions, the risk is solely on the employer, benefits are invested by the employer, and protected through the PBGC. An employee’s account is credited each year with a contribution from the employer and an interest credit that is linked to an index rate (IRS, 2016). The employee does not have to contribute to a cash balance plan, but if they chose to do so, the benefits …show more content…
Pensions allow people to live independently even after they have finished their service for a company. Defined benefit plans, defined contribution plans, and hybrid plans are found throughout many businesses as the designated retirement plans. Defined contribution plans have fixed contributions by the employee, but the employer can contribute as well. There is no precise benefit at the end of retirement, and these plans are not insured. Employers generally like these plans because there is less risk and cost to the employer. Typical defined contribution plans include: 401(k) plans, profit sharing plans, employee stock bonus plans, money purchase plans, SEP, and TSP. A 401(k) plan allows employees to have a portion of their pay, with an employer matching the amount to be contributed at times. A profit-sharing plan is a retirement plan that is based on annual profits from the previous year with the employer providing, often irregular contributions. A money purchase plans requires the employer contributions, regardless of the employer’s profits, and the employee may contribute to this plan. An ESOP provides shares of stock, or money to buy the stock of the company to participating employees. A SEP allows the employer to make contributions to individual retirement accounts (IRAs) for each employee, and the amount can vary year to year. A TSP is a pension plan designed for the United States Civil Service employees where the employee will make contributions, and the employer can choose to match the employee contributions, but there is no legal obligation for this to occur. A defined benefit plan states the employer will contribute an exact amount, and the employee will receive a specific benefit retirement, and is provided in the form of an annuity. A hybrid plan is pension plans those that attempt to combine the key features of defined benefit and defined contribution plans,