Question: Is a Cash Balance Plan a Pension Plan?
Pension plans can be a little complicated. Sometimes the employee doesn’t understand what a cash balance plan really is. Will they get a monthly payment after retirement, or will they get a lump sum payment when they are ready to retire?
To be called a pension plan it must have a defined benefit option. A typical defined benefit plan is a plan that you receive a benefit when:
- You reach a certain age, or
- You’ve reached a certain number of years in service, or
- Maybe adding together service and age or some combination of years of service and points.
One or several of the above criteria are often used to calculate a formula to determine your benefit amount. To qualify as a pension plan, a cash balance plan must offer an annuity option. A cash balance plan also offers a “lump sum payment.” When you are ready to retire and make your election, you can choose either the annuity option or the lump sum payment.
On your statement is a stated cash balance. What does that mean? It is what they call a hypothetical. The money really doesn’t exist yet in and of itself. However, it is an amount credited to you. The advantages of this type of plan are as follows:
- It is funded by the employer with a guarantee you earn a certain percentage of return per year.
- The employer chooses the investment vehicle, and takes all the risk in the investment while you reap the benefit.
- Because it is a private plan, it is government insured by PBGC (Pension Benefit Guarantee Corporation).
So is it a pension plan? Yes, a cash balance plan is a pension plan. Does it have a lump sum option? Yes, it has both an annuity and lump sum option. If you are taking the lump sum option, you may be able to roll it over into an IRA, then take it out slowly to lessen the tax impact. So choose wisely, my friend.
And if any of you are still conscious after reading this, I applaud your tenacity!
While there is nothing sexy or exciting about a cash balance plan, if you have one, this will give you some of the basics.