Cash Balance Plan. A cash balance plan is a type of defined benefit plan. Like all defined benefit plans, cash balance plans guarantee a benefit amount to covered employees on the basis of a known formula. Employers bear the financial risk of cash balance plans and are required to maintain sufficient funds to pay future benefits. The unique nature of a cash balance plan is that benefits are defined as a lump sum--the "cash balance" of a covered employee's account--rather than as a periodic payment to be received during retirement.
An employee's balance in a cash balance plan is made up of hypothetical deposits and interest as specified in the plan's formula. That amount is available to the employee once he or she is vested, subject to tax law restrictions. The advantage of such a plan is that the employee knows the "cash" value of the plan at any time. In actuality, the plan is funded by the employer on the basis of an annual actuarial valuation, just like all other defined benefit plans: the employer must deposit sufficient funds to allow the plan to pay future benefits.
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