Personal Finance & Estate › Retirement accounts & pensions › Defined-benefit pension
Cash-balance plan
Since 1985· Account or plan
Depends on youExperts differ; the right answer depends on your situation.
A pension that looks like an account: the employer credits each worker a set share of pay plus guaranteed interest.
See it on the Personal Finance & Estate map →How it works
Legally it is a defined-benefit plan, but each worker sees a hypothetical balance built from a pay credit (say 5% of salary) and an interest credit (fixed, or tied to Treasury yields). Bank of America adopted the first in 1985. Today it suits doctors, lawyers and other high-earning owners, paired with a 401(k); someone in their late 50s or 60s can often deduct well over $100,000 a year. Main traps: required yearly funding, actuary fees and covering staff. Depends on you; ask your CPA.
Why it matters for you
It allows the largest tax-deductible retirement contributions many owners can make, but it is a multi-year commitment, not a one-year tax trick.
Rules, limits and sources (2026)
IRC Secs. 401(a) and 411; the Pension Protection Act of 2006 confirmed their legality; Form 5500 data compiled in annual industry reports show steady growth.
Watch out for
Whether 1990s conversions of traditional pensions (IBM, 1999) shortchanged older workers was fought in court for years; Congress set rules for future conversions in 2006.
Connections (2)
▸Cash-balance plan is a hybrid form of Defined-benefit pensionStandard practice
How they connect
Legally a cash-balance plan is a defined-benefit pension: the employer guarantees the credits, bears investment risk, funds it actuarially and is usually PBGC-insured. But it shows benefits as an account balance, like a 401(k), and usually pays a portable lump sum, so it blends both worlds.
When it applies
Designed for Bank of America in 1985; spread through big-employer conversions in the 1990s and, since 2006, small professional firms.
How sure?
The Pension Protection Act of 2006 confirmed cash-balance plans as defined-benefit plans and set age-discrimination rules; IRS regulations followed (2010, 2014).
Watch out for
Whether hybrid plans give workers the best of both designs or the weaknesses of both is still debated.
▸Pension Benefit Guaranty Corporation (PBGC) also insures Cash-balance planLaw or rule (2026)
How they connect
Because a cash-balance plan is legally a defined-benefit pension, the PBGC insures its benefits up to legal limits, and the employer pays yearly PBGC premiums. Exceptions: professional firms (doctors, lawyers) with 25 or fewer participants, and plans covering only owners, are exempt from coverage.
When it applies
PBGC coverage comes from ERISA Title IV (1974); plan sponsors pay premiums every year.
The rule
ERISA Sec. 4021 lists covered plans and exemptions; the PBGC publishes premium rates and maximum guarantees each year.
Watch out for
Whether a small firm's plan is covered can turn on headcount and profession; the actuary and an ERISA attorney make the call.