Continuing with part 2 of our Cash Balance Plan FAQ series, we will address Pay and Interest Credits, participant hypothetical accounts, investing and funding deadlines.
The Pay Credit is the contribution amount as specified in the plan document. The Interest Credit is usually a fixed rate of return that the plan guarantees.
No. Unlike a 401(k) plan, Cash Balance plans do not offer fund investment choices. Each established account is set aside as a “hypothetical account” for each contributing employee. At the end of each year, the employee receives a statement of their contributions and return on investment.
In a Cash Balance plan, unlike a 401(k) plan, the investment risk lies with the employer as all assets are trustee-directed in a single pooled account. Depending on benefits calculated and investment performance, a minimum required contribution is calculated each year. If the plan fails to meet the return prescribed by the plan document, this minimum contribution increases accordingly. Conversely, the consequence of too much investment return is a reduced funding limit which potentially leads to increased tax liability for the employer.
The following rates may be used for a Cash Balance plan:
The Trust’s investment strategy should be coordinated with the plan’s crediting rate to avoid losses. The cash balance plan document will indicate an interest crediting rate for the plan which provides the targeted earnings for the plan assets each year.
Business owners should expect to offer the plan to no fewer than 40% of their employees and provide a combined benefit of 7.5% of pay to staff (a typical standalone 401(k) plan benefit is closer to 5% of pay). However, depending on the company demographic, a significant percentage of the overall contribution can be directed towards the owners. BRI charges a nominal fee to perform this feasibility study, which we apply against our setup costs for new clients.
The funding is due the date of your tax return, including extensions but NO LATER than 8 ½ months after the end of the plan year.
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Cash Balance Plan Basics - FAQs Part 1
Cash Balance Plan Basics - FAQs Part 3
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