A cash balance plan keeps all its money in one trust account at a brokerage. Alongside it, the plan keeps a record for each person it covers of the pay credits and interest credits added for them. The tax code calls that record a hypothetical account (IRC 411(a)(13)), because no money sits in it. It measures what the plan owes you, and at retirement or when the plan ends it is the lump sum you can take.
Three figures are easy to mix up:
- The pay credit is what the plan's formula adds to your hypothetical account for the year.
- The contribution is what the business pays into the trust, within the range the actuary sets. It is rarely exactly the pay credit.
- The trust's value is what the brokerage account actually holds.
With actual return crediting, the hypothetical account earns what the trust earns, so the two stay close. They still differ for ordinary reasons. A year's pay credit counts toward your account for that year, while the contribution that funds it can arrive up to 8½ months after the year ends. And the contribution follows the funding rules, not the pay credit.
Each year the enrolled actuary compares what the trust holds with what the plan owes. A shortfall raises later minimum required contributions. A surplus lowers them, and one left when the plan ends has its own tax rules; see closing a cash balance plan. Whatever the investments do, the benefit paid can never be less than the total of your pay credits, under the preservation of capital rule.