Cash Balance Plan - Explained
What is a Cash Balance Plan?
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What is a Cash Balance Plan?
Cash balance plan (CBP) refers to a benefit or pension plan that acts similarly as a defined contribution plan. Similar to a traditional pension, CBP provides the workers with the scheme that provides a lifetime annuity. However, contrary to the pensions, CBP creates an account for an individual employee that has a specified lump sum. Many companies converted their pension plans to cash balance plans. This is because the scheme provided by the cash balance plan is cheap compared to other plans.
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How a Cash Benefit Plan works
The cash balance plan provides that the companies under the plan should make their annual contribution towards the scheme. The money contributed to the scheme is invested, and it attracts some percentage of interest which is credited directly to the company`s account. The interest rate usually comes with a fixed percentage rate or variable rate attached to IRS treasury interest. When the investment yields better interest, the company will channel their investment for future benefits in the reserve account. On the other hand, when the investment does not yield a good interest, the company will be forced to pull out of reserve account. When the company makes a big loss in its investment, it may be forced to increase their contribution in the subsequent year to increase the savings in the reserves account. Besides, the cash balance plan gives the company an opportunity to amend its plan and make more contribution to individual accounts within the plan. In other words, the company takes investment risks for its employees.
The White Coat Investors Cash Balance Plan
The cash balance plan provided by the MedAmerica has a different plan for the partnership business. The Pension Protection Act of 2008 enables the pension plan to pay for the investors and the participants the actual return of the plan rather than that of the IRS treasury rate that fixed a condition that returns cannot be less than zero. The MedAmerica plan has created a cap of 6.5% with surplus earning channeled to reserve account and be drawn in the event of market losses. The surplus money is shared across 8 mutual investment funds. The investment attracts the ratio of 46% / 54% bond/stock ratio. The investment committee makes an annual agreement and decides the best interest to credit to the participants. When the investment produces low or no return, the interest payment is not credited to the participant account. However, if the investment generates a higher return, the cap of 6.5 % is credited to the reserve account. When the company contributes more funds to compensate the losses, it can lead to the economic downturn especially when the participants buy low personal accounts. This may make the employee not to get any share of the reserve even in the event of higher return in the previous year.
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