Demystifying Cash Balance Plans: What Policy Admins Need to Know

When it comes to retirement plan design, policy administrators and HR leaders often find themselves balancing two priorities: keeping benefits competitive for employees while ensuring the plan remains cost-effective and manageable for the business.

For small- to mid-sized companies, especially those with owner-heavy or professional firm structures, cash balance plans are emerging as a powerful way to achieve both.

But what exactly is a cash balance plan, and why are so many organizations exploring them as an alternative or complement to a traditional defined benefit plan? Let’s break it down.

What is a cash balance plan?

At its core, a cash balance plan is a type of defined benefit retirement plan that looks and feels more like a 401(k). Each participant has an account that grows annually with two credits:

• Pay credit: A percentage of pay or a flat dollar amount contributed by the employer.
• Interest credit: A guaranteed rate of return, either fixed or tied to an index.

Unlike a 401(k), the employer, not the employee, bears the investment risk. This is the core difference between a cash balance plan and a defined contribution plan. The interest credit is a guaranteed return that the employer is legally obligated to provide, regardless of how the plan’s investments perform. This means plan funding is an ongoing concern for the employer.

A cash balance plan is technically a pension. Its account-style format makes the plan easier for participants to understand and value. Because it is a pension, an enrolled actuary is required to certify its funding status each year. The actuary performs complex calculations to determine the minimum amount the employer must contribute to ensure the plan can pay out all future benefits. This is a critical administrative step that has no equivalent in 401(k) or typical insurance policy administration.

Why are cash balance plans growing in popularity?

Cash balance plans are not new, but they are gaining traction in today’s competitive labor market for a few key reasons:

• Accelerated savings for owners and executives
  These plans allow business owners and high earners to set aside significantly more for retirement than annual 401(k) or profit-sharing limits permit.
• Recruitment and retention edge
  Offering a unique, high-value retirement benefit helps firms stand out in industries where talent is hard to keep.
• Predictability for employers
  Unlike traditional pensions, plan contributions and liabilities are more predictable, making budgeting easier.
• Flexibility in plan design
  Plans can be structured to meet business goals—whether maximizing owner benefits, balancing across employee groups, or integrating with an existing 401(k).

Not every company will benefit equally from using cash balance plans. Firms with consistent profitability and an owner-heavy workforce tend to see the greatest advantages.

What policy admins should keep in mind

As a policy administrator, you’ve probably already realized that managing a cash balance plan is fundamentally different from administering a 401(k) or an insurance policy. While the participant-facing side is simple, the backend administration carries significant fiduciary responsibility for the plan sponsor. It requires a close working relationship with an actuary and a deep understanding of complex federal regulations (ERISA, IRC).

Here are a few other considerations to keep in mind:

Compliance and administration

Cash balance plans are subject to defined benefit plan rules, which means testing, funding requirements, and annual filings. Partnering with the right experts can ease the administrative lift.

• Compliance and Regulatory Filings: This is a crucial area. Administrators must ensure the plan complies with a variety of federal laws, including the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). This includes:
• Filing annual reports with the IRS and Department of Labor (DOL), such as Form 5500 and Schedule SB.
• Ensuring the plan passes annual non-discrimination testing to prove it does not unfairly favor highly compensated employees.
• Working with an actuary, as already mentioned, to certify the plan’s funding and benefit calculations.

Employee communication is key

While these plans are simpler than traditional pensions, they still require clear explanations to help participants understand their value. A key role of the administrator is to clearly and effectively communicate with plan participants. This includes:

• Providing a Summary Plan Description (SPD) and Summary of Material Modifications (SMM)
• Providing regular benefit statements to employees, showing their hypothetical account balance
• Explaining the plan’s features, including how benefits are calculated, vesting requirements, and distribution options
• Providing at least 45 days’ notice for any plan amendments that significantly reduce future benefits

A powerful strategic tool

At IMA retirement, we specialize in helping policy administrators and HR leaders design and manage retirement plans that align with both business goals and employee needs. Whether you’re evaluating your current offerings or exploring cash balance plans for the first time, our team can guide you through the design, compliance, and communication process—so you can focus on the big picture.

Cash balance plans are no longer just a niche solution for large corporations. For small- to mid-sized businesses, they can be a strategic way to retain top talent and supercharge retirement savings—without the complexity you might expect.

By understanding how these hybrid plans work and when to implement them, policy administrators can gain a competitive edge in shaping the future of their organization’s benefits.

Download our free PDF guide to simplify cash balance plan concepts for internal discussions and leadership presentations.