Glossary
Cash Balance Plan
A cash balance plan is a defined benefit pension that expresses each participant's benefit as an account balance, credited annually with a pay credit and an interest credit set by the plan.
Legally it is a pension — the employer bears the investment risk and funding obligation — but it looks like an account to the participant, and the balance is typically portable as a lump sum or rollover at departure.
Why it matters in practice
For business owners and high-earning professionals, a cash balance plan layered on top of a 401(k) can allow annual tax-deductible contributions far above 401(k) limits — often six figures for older owners — because defined benefit funding rules key off the benefit promised, not a fixed contribution cap. The cost is complexity: actuarial certification, required annual funding, and nondiscrimination testing.
Related terms: Defined Benefit Plan · 401(k) · Pension · Plan Sponsor · Nondiscrimination Testing