401(k)/Profit Sharing vs. Cash Balance Plans
401k/Profit Sharing Plan— A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered & sponsored by most employers to their employees. Workers can make contributions to their 401(k) accounts through an automatic payroll withholding. Matching is optional, but often offered & the investment earnings are not taxed until the employee withdraws that money, typically in or after retirement.
Cash Balance Plan — A cash balance plan is a qualified (tax-favored) retirement plan that combines the high contribution amounts of a defined benefit plan with the look, feel and portability of a defined contribution plan. For that reason, it’s called a “hybrid” plan.
Cash balance plans resemble 401(k) plans in terms of offering individual, portable retirement accounts. But they allow significantly higher contribution levels and use different investment principles.
A cash balance plan communicates the promised benefit to employees as an account balance rather than an annual amount payable for life.
