What Is a Cash Balance Plan? A Plain-English Guide
Cash balance plans look like 401(k) accounts but are defined benefit plans under the Code. They are powerful for owner-led businesses — and can host a 401(h) sub-account.
Key takeaways
- Cash balance plans are defined benefit plans for tax purposes.
- Participants see a hypothetical account balance that grows with credits.
- Owner contributions can be substantially larger than 401(k) limits.
- Cash balance plans can host a 401(h) retiree medical sub-account.
DB plan in account-style clothing
A cash balance plan is a defined benefit plan under the Code, but participants are shown a hypothetical account balance that grows each year with a pay credit and an interest credit. The 'account' is a communication device — the plan is funded actuarially like any DB plan.
Why owners use them
Cash balance plans let employers contribute substantially more than 401(k) and profit-sharing limits, particularly for older owners. The structure is widely used to accelerate retirement savings in the final working decade.
How 401(h) fits
Because cash balance plans are DB plans, they qualify to host a 401(h) sub-account for retiree medical benefits. Adding 401(h) expands what the same plan ecosystem can do.
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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