Questions and Answers on Cash Balance Pension Plans
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Years of service | Percentage of pay |
---|---|
Less than 5 | 2 |
5 to 9 | 4 |
10 to 14 | 6 |
15 to 19 | 8 |
20 and above | 10 |
Under an age-plus-service plan, the percentage of pay is based on the sum of age plus service, as in this example:
Age plus years of service | Percentage of pay | Less than 30 | 5 |
---|---|
30 to 39 | 6 |
40 to 44 | 7 |
45 to 49 | 8 |
50 to 54 | 9 |
55 to 59 | 10 |
60 to 64 | 11 |
65 to 69 | 12 |
70 to 74 | 13 |
75 to 79 | 14 |
80 or more | 15 |
Individual accounts are also credited with interest, which is often determined by the interest rates of certain U.S. securities. The interest is usually received on the accumulated balance of the account at the end of the year. This might be explained in terms of annual interest credits, where the employee receives interest credits on December 31 of each year. Interest is credited not only on the benefit credit received on January 1 of that year, but also on all benefit and interest credits accumulated during earlier years.
By their very nature, cash balance plans are guided by two opposing principles. First, they are defined benefit plans and thus by law must specify a normal retirement age and make benefits available in the form of an annuity. In fact, the automatic form of payment for a married employee must be a joint-and-survivor annuity. On the other hand, vested participants in cash balance plans are entitled to access to their account balance in a lump sum at any time, regardless of the "normal" retirement age. This is one of the appeals of such plans.
Typically, such plans specify a retirement age for both early and normal retirement, but also offer other forms of payment, including lump sums, which employees may choose (with, in the case of married employees, appropriate spousal consent). The retirement ages may only apply to benefits taken in the form of an annuity.
For example, a plan may specify age 55 for early retirement and age 65 for normal retirement. Such retirement ages are typically only applicable to benefits received in the form of an annuity. Periodic annuity payments are calculated on the basis of life expectancy, so someone retiring at age 55 and expected to live 30 years will receive a smaller annual annuity than someone with the same cash balance retiring at age 65 and expected to live 20 years.
When a retirement plan allows a vested participant access to their account balance at any time, particularly before the early retirement age, it is not typically referred to as retirement or even early retirement. Cash balance plans may allow such vested participants to receive either a lump sum or an annuity. However, if a vested participant has a small, accumulated balance, he or she will most likely have to accept the balance as a lump sum. Workers who take such lump sums can maintain their pension benefit and avoid tax penalties by transferring funds into an Individual Retirement Account.
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