Cash balance or traditional pension?
In the case of an applicable defined benefit plan, such plan shall be treated as meeting the requirements of subsection (a)(2) only if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.
An applicable defined benefit plan is the statute's name for a cash balance plan and plans like it. A ceiling on the wait, not a required wait. Read 26 U.S.C. 411(a)(13)(B) in full (opens in a new tab)
The short answer
A cash balance plan and a traditional pension are both defined benefit plans, funded by the employer under the same limits and funding rules. A traditional pension states the promise as a yearly benefit at retirement; a cash balance plan states it as an account balance built from pay credits and interest credits. A cash balance plan must vest each person fully after 3 years of service, while a traditional pension may wait 5 years, or 7 on a graded schedule.
What is the difference between a cash balance plan and a traditional pension?
Both are defined benefit plans funded by the employer. A traditional pension states the promise as a yearly benefit starting at retirement, figured by a formula in the plan. A cash balance plan states the same kind of promise as an account balance, built each year from a pay credit and an interest credit.
26 U.S.C. 411(a)(7)(A)(i) and 411(a)(13)(C)(i) (opens in a new tab)U.S. Department of Labor, cash balance pension plans fact sheet (opens in a new tab)| Rule | Traditional pension | Cash balance plan | Source |
|---|---|---|---|
| How the promise is stated | A yearly benefit starting at normal retirement age. | The balance of a hypothetical account for each person. | 26 U.S.C. 411(a)(7)(A)(i); 411(a)(13)(C)(i) (opens in a new tab) |
| What builds the benefit | A formula written into the plan document. | A pay credit and an interest credit added to the account each year. | U.S. Department of Labor, cash balance pension plans fact sheet (opens in a new tab) |
| Interest credit | None. The formula sets the benefit. | A rate written into the plan, no greater than a market rate of return. A fixed 6 percent is deemed within that limit. | 26 U.S.C. 411(b)(5)(B)(i)(I) (opens in a new tab)26 CFR 1.411(b)(5)-1(d)(4)(v) (opens in a new tab) |
| Vesting of employer money | Fully vested after 5 years, or 20 percent after 3 years rising to 100 percent after 7. | Fully vested after 3 years of service. | 26 U.S.C. 411(a)(2)(A)(ii); 26 U.S.C. 411(a)(2)(A)(iii); 26 U.S.C. 411(a)(13)(B) (opens in a new tab) |
| Annual benefit limit, 2026 | $290,000, or 100 percent of average pay for the highest 3 years if lower. | The same limit. The account is tested against it as a yearly benefit. | IRS Notice 2025-67 (opens in a new tab)26 U.S.C. 415(b)(1)(B) (opens in a new tab) |
| Minimum funding | Required every year. The minimum is due eight and a half months after the plan year ends. | The same rule. | 26 U.S.C. 430(j)(1) (opens in a new tab) |
| Who carries the investment risk | The employer. Benefits do not depend on asset returns. | The employer. Earnings above the interest credit reduce future contributions, and earnings below it raise them. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)26 U.S.C. 411(b)(5)(B)(i)(I) (opens in a new tab) |
How does vesting differ between a cash balance plan and a traditional pension?
A cash balance plan must vest each person fully after 3 years of service. A traditional pension may wait longer: full vesting after 5 years, or a graded schedule that vests 20 percent after 3 years and 100 percent after 7. Each schedule is a ceiling, so a plan may vest people sooner.
A plan is top-heavy when key employees hold more than 60 percent of the benefits. A top-heavy plan must vest fully after 3 years, or follow a graded schedule from 20 percent after 2 years to 100 percent after 6. A vesting number means nothing without the plan type beside it.
| Years of service | Traditional pension, graded | Top-heavy plan, graded | Source |
|---|---|---|---|
| 2 | Not yet vested | 20 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
| 3 | 20 percent | 40 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
| 4 | 40 percent | 60 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
| 5 | 60 percent | 80 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
| 6 | 80 percent | 100 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
| 7 | 100 percent | 100 percent | 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)26 U.S.C. 416(b)(1)(B) (opens in a new tab) |
Is a cash balance plan a defined benefit plan?
Yes. The tax code calls a cash balance plan an applicable defined benefit plan: a defined benefit plan whose benefit is figured as the balance of a hypothetical account. The account is a measure of what the plan owes each person, not money the person invests, as an employee does in a 401(k).
A cash balance plan follows the same benefit limit, minimum funding rules, enrolled actuary and yearly filings as a traditional pension. The differences sit in how the promise is stated, how it grows and how fast it vests.
26 U.S.C. 411(a)(13)(C)(i) (opens in a new tab)What interest does a cash balance account earn?
A cash balance plan credits each account with an interest rate written into the plan document. Federal law caps that rate at a market rate of return, and a fixed rate of 6 percent is deemed within that cap. The interest credit is a promise to participants, not a prediction of what the plan’s investments will earn.
Earnings above the credit reduce future contributions, and earnings below the credit raise them. A traditional pension has no interest credit at all. The formula fixes the yearly benefit, and the employer funds whatever the benefit costs.
An annual interest crediting rate equal to a fixed 6 percent is deemed to be not in excess of the interest rate described in paragraph (d)(3) of this section.
A fixed rate the regulation treats as within the market rate limit. A promise to participants, not a return. Read 26 CFR 1.411(b)(5)-1(d)(4)(v) in full (opens in a new tab)
What do both kinds of pension ask of an owner?
The IRS lists the defined benefit plan as the most costly type of plan and the most administratively complex one. The contribution is mandatory each year within the range the enrolled actuary certifies, and an unpaid minimum is taxed at 10 percent, then 100 percent if the amount stays unpaid.
The employer bears the investment risk. Benefits do not depend on asset returns, so a shortfall raises future contributions. The money stays in the plan until age 59½, separation from service or the end of the plan, and a distribution before 59½ carries a 10 percent additional tax unless an exception applies. Staff must be covered and credited under federal tests. Fees for the actuary, the administrator and the filings are paid every year.
Internal Revenue Service, Defined benefit plan page (opens in a new tab)26 U.S.C. 4971(a)(1); 26 U.S.C. 4971(b); 26 U.S.C. 72(t)(1) (opens in a new tab)Checked on October 15, 2026.