A cash balance plan is a defined benefit plan with characteristics of both a defined benefit plan and defined contribution plan. Specifically, benefits consist solely of employer contributions which are typically a flat percentage of an employee’s wages (e.g., 4% or 5%). Each employee has an individual cash account which is made up of the employer contributions and interest thereon. 

In many cases, the cash balance plan replaces an existing defined benefit plan. In those cases, an employee’s benefit is equal to the present value of his or her accrued benefit.  The employee’s benefit is thereafter expressed as a lump sum balance which will grow based on interest credits varying from year to year – and future contributions. Since the benefit is expressed as a lump sum, these plans permit lump sum distributions which include IRA rollovers. In addition, benefits are often payable as a lump sum to beneficiaries at the death of the employee. With a traditional defined benefit plan, the only benefit payable is commonly a reduced (e.g., 50%) qualified pre-retirement survivor annuity or qualified joint and survivor annuity.

If you are dividing a cash balance plan, the most important consideration is whether it was converted from a traditional defined benefit plan, and if so, the date of the conversion. Suppose such a plan was converted from a traditional defined benefit plan on January 1, 2003 and the parties’ date of separation was January 1, 2001. This means that on January 1, 2001, the accrued benefit was based largely on years of service credits and salary. On and after January 1, 2003, the benefit is based on contributions to the account and interest credits thereon. If the employee had pre-marital service, the benefit should be divided using two formulas. The time-rule formula should be applied to the accrued benefit as of January 1, 2003, since the benefit through that date is based in part on service credits. After that date, however, the benefit payable to the non-employee spouse is based on the cash balance account as of January 1, 2003, adjusted for interest credits through the date funds are paid to the non-employee.

Other important considerations concern distribution rules and death benefits. As stated above, cash balance plans permit lump sum payout, including rollovers, sometimes as early as age 50. Non-employees have nothing to lose by rolling funds over to an IRA at the earliest possible date. This gives the non-employee full access over his or her funds, including unlimited investment choices. 

Unlike a traditional defined benefit plan, which will only pay out a pre-retirement survivor annuity equal to 50% of the accrued benefit if the participant dies before retirement, a cash balance account will pay out 100% of the participant’s cash balance account to his or her beneficiaries at death. This means that there is no reduction if the participant dies before retirement. Not only will the QDRO fully protect the non-employee’s right to receive his or her full (unreduced) benefit if the participant dies first, but these plans typically extend the right to name a beneficiary to the non-employee – meaning that if he or she dies before receiving payment, the plan will pay those benefits to the non-employee’s beneficiaries.