Approximately 400 to 600 mid-sized and large companies, including 22 of the Fortune 100 companies, have adopted cash balance plans. The current debate revolves around whether cash balance plans benefit younger employees and employers at the expense of older employees. Each participant in a cash balance has a hypothetical individual account that is credited each year with hypothetical predetermined interest, creating a hypothetical account balance. The hypothetical account balance forms the basis of the defined benefit that is distributed to the participant. To date, most employers have been successful in defending the class action lawsuits which have challenged cash balance plan conversions.
Participants receive periodic statements which show their benefits in the form of a single sum.
In these respects, a cash balance plan resembles a defined contribution plan. However, the assets in the plan may be more or less than the sum of the hypothetical individual accounts, leaving the funding risk on the employer. For this reason, a cash balance plan is a defined benefit plan. Benefits can be distributed in the form of a lump sum, which can be rolled over to an IRA or another employer's qualified plan, making the benefit more portable. Adopting a cash balance plan may allow an employer to reach the assets in an overfunded defined benefit plan.