Retirement Plans
Cash Balance
Frequently Asked Questions
What is a Cash Balance plan?
A Cash Balance plan is a type of Defined Benefit plan which provides participants with a hypothetical account balance
that consists of: 1) an employer-funded benefit or “pay credit” and 2) a targeted rate of return or “interest credit”, which
is not dependent on the plan’s investment performance. Both funding components are determined by the plan
document within limits set by law.
How does a Cash Balance plan work?
A Cash Balance plan provides employees with an annual employer pay credit and an interest credit which is set by the
plan. The plan’s interest crediting rate may be tied to an index such as the 30-year Treasury Securities Interest Rate. A
hypothetical account is maintained for each participant, but the participant does not direct the investment options of
their account. Instead, the plan sponsor is responsible for investment selection and monitoring to ensure that the plan
remains sufficiently funded to meet all promised benefits.
What are the primary benefits of a Cash Balance plan?
There are three primary benefits of a Cash Balance plan:
1. Business tax deductions – employer allocations to a Cash Balance plan may allow for a potential increase in tax
deductions to the business.
2. Higher benefit limits – funding limits for Cash Balance plans are significantly higher than 401(k) or profit sharing
plan contribution limits. In fact, depending on employee data such as age and salary, annual contributions to fund
an employee’s hypothetical account balance could be more than $200,000*. These higher benefit limits allow the
opportunity to accelerate retirement accumulation.
3. Flexibility to weight benefits – Cash Balance plans can favor owners and/or key employees.
What are the benefit limits for a Cash Balance plan?
A company Cash Balance allocation is determined by a formula specified in the plan document. It can be a percentage
of pay or a flat dollar amount. While the actual limits may vary based on different actuarial assumptions and plan
design, in general, the amounts that may be used to fund a Cash Balance plan greatly exceed those allowed in a 401(k).
Your Third Party Administrator will help you determine the formula best suited to your plan.
Why are Cash Balance plans potentially attractive now?
Cash Balance plans have become more popular in recent years in part because the Pension Protection Act of 2006
(“PPA”) clarified a number of issues that previously affected Cash Balance plans. The PPA granted statutory
recognition to “hybrid” retirement plans, such as Cash Balance plans. Prior to the Act, these plans were not officially
recognized by the tax code.
Additionally, Cash Balance plans are potentially attractive now for two primary reasons: 1) the higher funding limits
may address strict defined contribution limits and 2) the increased tax deduction for the employer may help
businesses paying a significant amount in taxes - typically $100,000 or more annually.
Are all employees eligible to participate in a Cash Balance plan?
Yes. All employees may be eligible to participate in a Cash Balance plan. To pass non-discrimination
testing, a Cash Balance plan must benefit at least 40% of employees or 50 total (whichever is less).
Your Third Party Administrator can help you design a plan to meet your needs.
* Assumes participant as age 60 and maximum employer allocation is made.
What are the key considerations of establishing a Cash Balance plan?
There are many factors that one should consider before establishing a Cash Balance plan. Among the key
considerations are:
• Mandatory annual funding and participation requirements. Cash Balance plans require mandatory annual
employer funding and are most appropriate for businesses or practices with a strong and consistent profit history.
The employer controls the investment choices and bears the investment risk. In addition, there are nondiscrimination rules in place for Cash Balance plans that may impact or affect the plan design and, therefore,
participation requirements. Typically, forty percent of employees or 50 total (whichever is less) must benefit from
a Cash Balance plan
• Investment considerations. The interest crediting rate for a Cash Balance plan can either be fixed or based on a
targeted interest rate, such as the 30-year Treasury Securities Interest Rate. Typically, Cash Balance plans adopt a
more conservative investment strategy than a 401(k) plan. Plans that exceed their targeted rate of return may need
to reduce contributions to the plan for the following year, which also may lead to a smaller tax deduction for the
employer. Conversely, if the plan’s returns are below the stated return, the employer might need to make up the
difference by making larger contributions in the following years.
How can I determine if a Cash Balance plan is appropriate for my business?
Your financial professional and TPA can help you determine if a Cash Balance plan may meet the needs of your
business. A Cash Balance plan may be appropriate for your business or practice if you:
• Desire greater accumulation than is possible with the current 401(k) or profit sharing limits.
• Want to weight benefits in favor of certain employees.
• Seek potential creditor protection in the event of bankruptcy or lawsuit.
If the company has a 401(k), can it also set up a Cash Balance plan?
Yes. A Cash Balance plan may be offered in addition to another qualified plan, such as a 401(k) or profit sharing
plan. In fact, a 401(k) with a profit sharing plan complemented by a Cash Balance plan may help participants
accelerate accumulation.
How is the investment strategy of a Cash Balance plan different than that of a 401(k)?
The investment strategy for Cash Balance plans can differ greatly from a 401(k) plan. Unlike a 401(k) plan, participants
do not have control over the investment options of their account. It is the plan sponsor’s responsibility to fund the plan
so that it meets the benefits promised in the plan and to meet the minimum annual funding obligations. With this in
mind, the plan sponsor selects and monitors appropriate investment options to meet this obligation.
The benefit, as stated in the plan document, consists of an employer-funded benefit, or pay credit, and a targeted rate
of return, or interest credit. While investment strategies may vary, some plan sponsors may consider the 30-year
Treasury Securities Interest Rate as their plan’s interest crediting rate. For plans that choose the 30-year Treasury
Securities Interest Rate, the investment objective for the plan is to realize a net rate of return, after expenses, which
equals the 30-year Treasury Yield.
To learn more about The Hartford AviatorSM Cash Balance program, please contact
your financial professional or call The Hartford’s Sales Desk at 800-874-2502, option 4.
Cash Balance plan designs are complex and require the assistance of
your financial professional and third party administrator. Additionally, Cash
Balance plans require annual employer funding and they may not be
suitable for some businesses. The Hartford's materials highlight Cash
Balance plan advantages, but certain restrictions and limitations will apply
based on plan design and retirement plan rules, among other factors,
which may affect tax deductions, funding levels and distribution of plan
benefits. For a more complete picture of Cash Balance plans, please
consult with your third party administrator. For additional program
information, contact The Hartford at (800) 874-2502, option 4.
Before investing, you should carefully consider the investment
objectives, risks, charges and expenses of the mutual funds or
The Hartford’s group variable annuity products and funding
agreements, and their underlying funds. For fund and product
prospectuses and/or a disclosure document containing this
and other information, contact your financial professional or
visit our website. Read them carefully.
NOT INSURED BY FDIC OR ANY
FEDERAL GOVERNMENT AGENCY
MAY LOSE
VALUE
NOT A DEPOSIT OF OR GUARANTEED
BY ANY BANK OR ANY BANK AFFILIATE
This information is written in connection with the promotion or
marketing of the matter(s) addressed in this material. This
information cannot be used or relied upon for the purpose of
avoiding IRS penalties. These materials are not intended to
provide tax, accounting or legal advice. As with all matters of a
tax or legal nature, you should consult your own tax or legal
counsel for advice.
“The Hartford” is The Hartford Financial Services Group, Inc. and its
subsidiaries, including Hartford Life Insurance Company, Hartford Retirement
Services, LLC, and Hartford Securities Distribution Company, Inc (“HSD”). HSD
(member FINRA and SIPC) is a registered
broker/dealer affiliate of The Hartford.
The Hartford AviatorSM Cash Balance program is
funded by a group variable annuity contract
(Form series HL 20329) issued by Hartford Life
Insurance Company, Simsbury, CT. The Form
HL- 20329 series includes state variations.
FDIC BANK
NOT FOR USE WITH PARTICIPANTS
S-CBFAQ-FLY-ti 10/09 5M RPS 9138 Printed in U.S.A. © 2009 The Hartford, Hartford, CT 06115