Posted by Trent Accounting

Cash Balance Plan - What Are They And How Do They Work?

Cash Balance Plan - What Are They And How Do They Work?

A cash balance plan is something of a twist and change from a traditional pension plan. Similar to a traditional pension plan, a cash balance plan gives a chance to its workers the opportunity of annuity for the entire life. The difference is that an employee has separate account for their cash balance unlike the pensions.

Making a cash balance plan is a great advantage for employers as well as this that it gives the opportunity for a lot of savings for the employers. In this article, we will be reading more about the cash balance plan. We will see what is a cash balance plan as well as how do they work. 

What is a cash balance plan?

The plan involving a cash balance is such that upon the age of retirement, an employee who has participated in this will have the opportunity to access a certain amount of cash. For example, if the total amount is $40,0000 dollars, the whole plan includes contributions of the employer as well as the compound interest that develops with time. When the time of retirement comes for the employee, he/she can take the entire amount or else take it in parts as checks. 

Comparison between the traditional pension and cash balance

The trend of cash balance started when companies as well as the government started to convert their traditional pensions to the cash balance plans as a change to the hard pensions. If you get to know that your pension is now turning in to a cash balance plan, then there are a few things which you need to know and keep in your mind as well. 

Companies have this authority to freeze or even change a pension plan but they cannot do anything to the benefits which the employees have already achieved. Even if the terms of the benefits have been changed, you still have to access all the benefits that were mentioned in the original plan. 

Younger employees find it better if the traditional pension is converted to cash balance plan

A traditional pension is only achievable when the time to retire approaches or when you know that now you are no longer required in your company. The traditional pension is accumulated all because of the years of service that you have given in your company as well as because of the time that you have invested in your company. If you have been quite an experienced worker, who earns well and has a nice salary range, it will be your wish that your pension depends upon your wage. 

However, if we have a look at the cash balance plan, these cash balance plans are spread out evenly over the entire career of the worker and that which grow at the same rate with time. The dollars which the worker has earned with time have more value and are more worthy as compared to any other thing which we talk about. 

Options of cash balance

If you work somewhere in a company or else do a job, it is entirely your wish if you want to use your benefits or else if you wish to get back your benefits as a lump sum. If you choose the annuity, the cash balance belonging to you will be paid to you in tidbits after you retire in the later years. 

However, if you decide to take the lump sum, you can decide and take the entire money that you want to and use it in any way that you want to. 

So what is better, taking the cash balance plan in portions or as a lump sum? 

This depends entirely upon you whether you want to make use of your cash balance in portions or as a lump sum. If we talk about the youngsters and the youth of today, they prefer to take the cash balance plan as a lump sum so that they can use the amount to their interest or use it for something they have been waiting for so long. On the other hand, aged people believe in taking it in portions to meet their needs as they come up unexpectedly. 

Trent Accounting