Chapter 15
CASH BALANCE PENSION PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of cash balance pension plans
REVIEW:
This chapter gives an overview of cash balance pension plans. After a brief
discussion of when these plans are used, advantages and disadvantages, the
chapter covers design features. Tax implications are discussed next, directing
the reader back to Chapter 7 for additional information. The chapter then gives
some suggestions for alternatives, and provides instruction to review Chapter 10
for information on how to install a cash balance plan. Finally, there is a reference
for learning more.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features Of These Plans
Tax Implications
Alternatives
How To Install A Cash Balance Plan
Where Can I Find Out More About These Plans?
Chapter Endnotes
FEATURED TOPICS:
Cash balance pension plans
1
Chapter 15
FIGURES:
Figure 15.1 Cash Balance Plan Accumulations: A
Figure 15.2 Cash Balance Plan Accumulations: B
Figure 15.3 Cash Balance vs. Conventional Plans
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
2. Defined benefit
b. Cash balance
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of cash balance pension plans
KEY WORDS:
cash balance pension plan, pay credit, interest credit
DISCUSSION:
1. Discuss advantages and disadvantages to using a cash balance
pension plan for both the employer and employee.
2. Discuss under what circumstances an employer might want to switch
from an existing defined benefit plan to a cash balance plan, along with
the implications of doing so.
QUESTIONS:
1. Which one of the following would be a good situation to consider
implementing a cash balance pension plan?
a. most employees are above age 50
b. when the work force is large and most employees are middle-income
Chapter 15
c. when the work force is small and most employees are very high-income
d. when an employer wants to convert a defined contribution plan to benefit
older workers
Chapter 15, p. 141
2. Which of the following types of credit are normally used with cash balance
plans?
(1) years-of-service credit
(2) pay credit
(3) interest credit
(4) supplemental benefit credit
a.
b.
c.
d.
(1) only
(1) and (2) only
(2) and (3) only
(3) and (4) only
Chapter 15, p. 141
3. Which one of the following is true regarding investment discretion by
participants (earmarking) in a cash balance plan?
a. not available, because the plan is not technically an individual account
plan
b. available, because the plan is not technically an individual account plan
c. not available, because the plan is technically an individual account plan
d. available, because the plan is technically an individual account plan
Chapter 15, p. 143
4. Which one of the following may be considered as a reasonable alternative,
because it will not eliminate a substantial amount of the benefits of a cash
balance pension plan?
a.
b.
c.
d.
individual retirement account (IRA)
stock bonus plan
SIMPLE 401(k)
traditional defined benefit plan
Chapter 15, p. 144
Chapter 15
ANSWERS:
1. b
2. c
3. a
4. d