Are Cash Balance Plans Subject to ERISA?

A cash balance plan is a retirement savings vehicle that blends features of different plan types. It functions like a defined contribution plan, such as a 401(k), by expressing a participant’s benefit as a hypothetical account balance. However, it is technically a defined benefit plan, meaning the employer bears the investment risk and guarantees a specific level of benefit. The plan grows through annual employer contributions and a guaranteed interest crediting rate.

The Employee Retirement Income Security Act of 1974 (ERISA) is the federal law governing private-sector employee benefit plans. ERISA establishes minimum standards for most voluntarily established retirement and health plans to protect the interests of participants and their beneficiaries. This framework dictates how the law applies to the structure of cash balance plans.

ERISA’s Application to Cash Balance Plans

Cash balance plans are subject to ERISA because federal regulators classify them as defined benefit (DB) pension plans, even though they present benefits in an individual account format like a 401(k). The defining characteristic is that the employer, not the employee, is responsible for funding the promised benefit and bears the investment risk of the plan assets.

This structure contrasts with defined contribution (DC) plans, where the employee’s benefit depends on their own contributions and investment performance. In a cash balance plan, the employer guarantees annual contribution credits and a minimum rate of interest on those balances. This promise of a specific future benefit places these plans under ERISA’s defined benefit regulations.

The only exceptions to ERISA’s reach are for plans established by governmental entities and certain plans maintained by religious organizations. For nearly all other private employers, sponsoring a cash balance plan means navigating the full scope of ERISA’s legal and administrative mandates.

Core ERISA Provisions Governing Cash Balance Plans

Reporting and Disclosure

An obligation under ERISA is transparent communication with government agencies and plan participants. The plan must annually file Form 5500, “Annual Return/Report of Employee Benefit Plan,” with the Department of Labor. The filing deadline is the last day of the seventh month after the plan year ends.

For participants, the plan administrator must provide a Summary Plan Description (SPD). This document explains the plan’s provisions, how it operates, and participants’ rights and responsibilities in plain language. Another disclosure is the Annual Funding Notice, which informs participants about the plan’s funding status.

Fiduciary Responsibilities

ERISA imposes a high standard of conduct on those who manage a cash balance plan, who are considered fiduciaries. They are legally required to act with loyalty for the exclusive benefit of plan participants and their beneficiaries. This includes the duty of prudence, which requires fiduciaries to act with care, skill, and diligence.

Fiduciaries are responsible for selecting and monitoring plan investments, ensuring that administrative costs are reasonable, and making decisions solely in the interest of providing benefits. Fiduciaries can be held personally liable for breaches of their duties that result in losses to the plan.

Funding and Insurance Requirements

As defined benefit plans, cash balance plans are subject to ERISA’s minimum funding standards. An enrolled actuary must perform an annual valuation to calculate the amount the employer must contribute to the plan to meet its future obligations. The employer is legally obligated to make these required contributions.

Benefits in most cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. This insurance protects a participant’s benefits, up to legal limits, if the plan is terminated without sufficient assets. To maintain this coverage, the plan sponsor must pay annual insurance premiums to the PBGC.

These premiums consist of a flat-rate per-participant amount and a variable-rate premium based on the plan’s level of underfunding. For 2025, the flat-rate premium is $106 per participant, and the variable-rate premium is $52 per $1,000 of unfunded vested benefits.

Participant Protection Rules

ERISA provides protections for the benefits earned by employees, including vesting. Vesting is the point at which an employee gains a nonforfeitable right to their accrued benefit. For cash balance plans, a “three-year cliff” schedule is common, where an employee becomes 100% vested after three years of service.

Another protection involves spousal rights. ERISA requires that the default form of benefit payment for a married participant be a Qualified Joint and Survivor Annuity (QJSA). A QJSA provides a monthly payment for the participant’s life and a continuing payment to the surviving spouse. A participant can choose a different payment form, such as a lump-sum distribution, only with the written, notarized consent of their spouse.

Ongoing Administrative Compliance

Maintaining a cash balance plan requires an annual administrative cycle. This process begins with the plan’s actuary performing a valuation to determine the employer’s contribution for the plan year. The plan sponsor must then deposit the funds into the plan’s trust by the deadline, which is no later than 8.5 months after the close of the plan year.

Following the contribution, the plan’s Third Party Administrator (TPA) prepares the Form 5500 for filing. The plan sponsor is also responsible for paying the required annual premiums to the PBGC to keep the plan’s insurance active.

Fulfilling fiduciary duties is an ongoing process that must be documented. Plan fiduciaries should hold regular meetings, at least annually, to review the performance of the plan’s investments and the services provided by vendors. These meetings and the decisions made should be recorded in official minutes to create a record of the prudent oversight process.