How Cash Balance Plans Work: Pay Credits, Interest Credits, and Funding
Pay credit + interest credit = hypothetical account growth. Actuarial funding fills the trust. Here's the mechanics, simply.
Key takeaways
- Each year participants get a pay credit and an interest credit.
- The hypothetical account is a communication tool, not an actual brokerage balance.
- The trust is funded actuarially by the employer.
- 401(h) can be added inside the same plan.
Pay credits
Each year, participants are credited with an amount tied to compensation under the plan's formula. The credit grows the hypothetical account.
Interest credits
The hypothetical account also receives an interest credit based on a rate defined in the plan. The rate may be fixed or tied to a published benchmark.
Funding the trust
The actuary determines required employer contributions so the trust supports the projected benefits. Investment performance vs assumption changes future contributions.
Adding 401(h)
Because cash balance plans are DB plans, they qualify to add a 401(h) sub-account. The retiree medical benefit is then funded actuarially alongside the retirement benefit.
Frequently asked questions
Availability, tax treatment, and plan design depend on the facts and circumstances of the employer, plan document, participant group, and applicable law. 401h.com provides general educational information only — not tax, legal, actuarial, investment, or ERISA advice. Consult qualified tax, legal, actuarial, and plan professionals.
401h.com Editorial
401h.com
The 401h.com editorial team publishes plain-English explainers on 401(h) retiree medical benefit plans. Educational only — not tax, legal, actuarial, investment, or ERISA advice.
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