What Is A Cash Balance Plan: Where and How To Use Them?

Tax Deduction for Contributions

Employer contributions to CBPs are tax-deductible, reducing taxable income. The deduction is taken in the year the contribution is made, subject to IRS limits and deadlines. ​

Cash Balance Plan Example

Consider a 55-year-old business owner seeking to boost retirement savings. By establishing a CBP, they could contribute over $200,000 annually, significantly more than the $26,000 limit for a 401(k), leading to substantial tax savings and accelerated retirement funding.​

Considerations

Before implementing a Cash Balance Plan, consider:

• Business Cash Flow: Can the business sustain annual contributions?
  
  
• Employee Demographics: Age and tenure can impact plan costs.
  
  
• Administrative Responsibilities: You’ll need a professional third-party administrator (TPA) and possibly an actuary to calculate minimum funding levels and ensure IRS compliance.
  
  
• Regulatory Requirements: CBPs must follow strict IRS guidelines under the Employee Retirement Income Security Act (ERISA), which includes nondiscrimination testing and minimum funding standards.
  
  
• Long-Term Commitment: This plan isn’t suitable for businesses with inconsistent revenue, as missed contributions may result in penalties and plan disqualification.
  
  
• Plan Complexity: Understanding actuarial assumptions, vesting schedules, and benefit formulas requires expert guidance.

Compliance and Legal Requirements

Cash Balance Plans must adhere to the following regulatory standards:

• Minimum Participation Requirements: Must benefit at least 50 employees or 40% of the workforce.
• Nondiscrimination Testing: Prevents benefits from favoring highly compensated employees.
• Funding Rules: Employers must fund the plan annually based on actuarial calculations.
• PBGC Premiums: Most plans require annual premiums paid to the Pension Benefit Guaranty Corporation unless the plan qualifies for exemption.

Tax Planning Strategies with a Cash Balance Plan

It opens doors to strategic tax savings, particularly for high-income earners. Here are common tax planning approaches:

1. Maximize Deductions:
   • Contributions to the plan are deductible by the business, reducing taxable income.
   • You can deduct well above the 401(k) annual contribution limit, especially for older business owners.
2. Pairing with a 401(k):
   • Combine with a Safe Harbor 401(k) for additional tax deferral.
   • In 2025, total contributions (employee + employer) can exceed $300,000+ depending on age.
3. Back-Loading Contributions:
   • Structure contributions to ramp up over time based on business profitability.
4. Accelerate Retirement Contributions in High-Tax Years:
   • Use the plan to offset high earnings during peak income years.
5. Exit Strategy Tax Shield:
   • Before selling a business, load contributions into the plan to reduce taxable gain.

CBPs are most effective when paired with tax projections and retirement planning models to forecast optimal contribution timing.

Case Study: How a Small Law Firm Saved $300,000+ in Taxes

Firm: Parker & Riley LLP
Location: New York City
Employees: 10
Annual Revenue: $3.2 million

Challenge: The two founding partners, aged 58 and 60, were facing a $500,000 combined tax bill due to high firm profits.

Solution: Their CPA and TPA designed a CBP that allowed each partner to contribute $265,000 per year, in addition to $30,000 via a Safe Harbor 401(k). The firm also contributed modest amounts to staff accounts to pass nondiscrimination tests.

Results:

• Total contributions deducted: $625,000
• Federal & state tax savings: ~$312,000
• Projected retirement balance in 7 years: $4.3 million combined
• Staff retention improved due to new retirement benefits

Real-World Scenario: Late-Career High Earner

Profile: Dr. Angela Moore, Age 57
Occupation: Surgeon
Annual Income: $950,000
Retirement Savings: Minimal, due to focus on growing practice

Goal: Catch up on retirement in 10 years

Strategy:

• Implemented a CBP with contributions of $280,000 annually
• Combined with a 401(k) + Profit Sharing of $66,000
• Total annual retirement contribution: $346,000

Impact:

• Tax savings in year 1: Approximate $155,000
• Retirement savings after 10 years: Estimated $4.1 million
• Peace of mind for late start to retirement planning

Who Should Use a Cash Balance Plan?

They are best suited for:

• Business Owners and Partners in Law, Dental, or Medical Practices who want to maximize tax-deferred retirement savings
• Older Professionals (age 45+) with high income and little retirement savings
• Entrepreneurs nearing exit looking to shelter proceeds from a sale
• Small Businesses with consistent annual cash flow and limited employees

Who Should Avoid It?

This plan may not be the best fit if:

• Your business income fluctuates significantly year to year
• You cannot commit to mandatory annual contributions
• Your employee base is very large, making nondiscrimination testing more complex
• You lack the support of a CPA, financial advisor, or TPA to manage the administrative load

Setting Up a Cash Balance Plan

As you can see this list and get the idea how YOU can set it up:

• Assess Business Profitability & Stability
• Work With a Qualified CPA or Actuary
• Select a TPA Experienced in Defined Benefit Plans
• Create a Custom Plan Design (age-based or flat dollar)
• Pair With a 401(k) for Optimal Tax Shelter
• Run Contribution Scenarios & Compliance Testing
• Educate Employees About the Benefit
• Ensure Ongoing Compliance with IRS & PBGC
• Review Annually to Adjust Contributions

Conclusion

A Cash Balance Plan is a powerful tool for tax savings, wealth building, and retirement planning—particularly for high-income professionals, business owners, and those looking to supercharge their retirement in a compressed time frame. While more complex than a 401(k), the high contribution limits, tax advantages, and predictable growth make it a compelling option.

For those nearing retirement, facing high tax burdens, or planning a business sale, implementing a CBP especially in combination with a 401(k) can significantly boost retirement security while slashing taxable income.

Start planning early and work with professionals to build a tailored solution that fits your financial goals and business profile.

FAQs

1. Is a cash balance plan worth it for small businesses?

Yes, especially if you’re a high-earning owner with consistent profits. Even with a few employees, you can design the plan to favor owner contributions while staying compliant. It becomes a smart tax shelter when paired with a 401(k) plan.

2. Can I have both a cash balance plan and a 401(k)?

Absolutely. In fact, it’s a common and highly effective strategy. The 401(k) gives you flexibility and employee incentives, while the cash balance plan lets you supercharge tax-deferred retirement savings—often allowing contributions well over $300,000 annually depending on your age.

3. How much can I contribute to a cash balance plan annually?

It depends on your age, income, and actuarial assumptions, but contribution limits can exceed $200,000 to $350,000+ per year for individuals 50 and older. Younger participants have lower limits but still significantly higher than typical 401(k) caps.

4. How are cash balance plans taxed?

Your business gets a tax deduction for contributions. You don’t pay taxes on the funds until you start withdrawing in retirement, similar to traditional retirement accounts. Withdrawals are typically taxed as ordinary income.

5. What happens if I can’t afford contributions in a certain year?

Cash Balance Plans are subject to minimum funding rules. Skipping a contribution can trigger penalties unless you freeze or terminate the plan properly. This is why the plan suits stable businesses with predictable income.

6. Are cash balance plans risky for business owners?

They carry some risks, like mandatory funding requirements and regulatory complexity. However, when professionally managed with an actuary and CPA, these risks can be minimized. The benefits—tax savings and retirement growth often outweigh them.

7. Can employees take money out early from a cash balance plan?

Yes, but early withdrawal penalties apply. Most plans offer a lump-sum rollover to an IRA, avoiding immediate taxation. However, if taken before age 59½ and not rolled over, a 10% early withdrawal penalty may apply on top of income tax.

8. Is a cash balance plan portable if I change jobs or retire?

Yes. You can roll over the balance to an IRA or another qualified retirement plan when you leave the company. It’s designed to be portable, unlike some traditional pension plans.

9. Are contributions to a cash balance plan guaranteed?

No. They’re subject to actuarial funding assumptions, but the employer must meet the promised annual credit. However, interest credits are guaranteed under the plan’s terms usually a fixed percentage or tied to a Treasury rate.

10. Are cash balance plans covered by PBGC insurance?

Yes, in most cases. The Pension Benefit Guaranty Corporation (PBGC) ensures most CBPs, adding a layer of protection for participants. Exceptions may apply for owner-only or certain professional practices.