Cash Balance Plans: Retirement Savings Past the 401(k) Cap
How a defined benefit plan lets a high-earning owner deduct far more than a 401(k) allows, what it costs to run, and when it is a mistake.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A cash balance plan is a defined benefit pension that promises each participant a hypothetical account credited with a pay credit and an interest credit each year. Because an actuary sets contributions to fund the benefit, an owner in their 50s or 60s can often deduct well over $100,000 a year beyond a 401(k).
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How is the contribution determined?
The plan defines a benefit — for example, a pay credit of a percentage of salary plus a fixed interest credit. An actuary calculates what must be contributed each year to fund that benefit by retirement age. Older participants need larger contributions because there are fewer years to fund the same benefit. The maximum benefit at retirement is capped by law — for 2026, an annual benefit of $290,000 or, if less, 100 percent of average pay for the highest three consecutive years, with pay counted only up to $360,000 — which translates into very large permissible contributions for owners near retirement.
| Owner age | Typical maximum annual contribution (illustrative) |
|---|---|
| 40 | Roughly $80,000 to $120,000 |
| 50 | Roughly $150,000 to $200,000 |
| 60 | Roughly $250,000 or more |
Exact figures depend on compensation, plan design, interest assumptions, and years of participation — the dollar cap is reduced by one-tenth for each year short of 10 years in the plan.
How does it combine with a 401(k)?
Most owners pair a cash balance plan with a 401(k) profit-sharing plan. The 401(k) side keeps employee deferrals and a profit-sharing contribution (generally held to 6 percent of pay by the combined-plan deduction limit when the defined benefit plan is not covered by the Pension Benefit Guaranty Corporation). Together, the two can exceed $300,000 a year for an older owner.
What are the conditions?
- Employees must be covered. Nondiscrimination testing usually requires meaningful contributions for staff — often 5 to 8 percent of pay in the combined design.
- Funding is mandatory. Unlike a profit-sharing plan, the annual contribution is required, with a range set by the actuary. Plans are meant to run for several years.
- Costs. Actuarial certification, plan documents, annual Form 5500 with a Schedule SB signed by an enrolled actuary (an owner-only plan files Form 5500-EZ and keeps the Schedule SB on file), and investment management.
- Investment risk sits with the employer. If assets underperform the interest credit, the business makes up the shortfall.
Who is it right for?
Owners age 45 and up with consistent, high profit, few employees relative to owners, and the intent to save aggressively for at least three to five years. Professional practices, consultancies, and family businesses with stable income are the typical users. Owners with volatile profit or many employees usually do better with a safe-harbor 401(k).
Frequently asked questions
Is the contribution deductible to the business?
Yes, within the funding limits, and it reduces the owner's pass-through income.
Can a sole proprietor or partner have one?
Yes. Contributions are based on net self-employment earnings.
What happens when I close the plan?
Benefits are distributed or rolled to an IRA. A plan terminated too soon after setup, especially one that was never funded as designed, can be challenged as not permanent.
Does the plan have to cover part-time staff?
Employees who meet the plan's age and service rules must be covered; a plan can exclude those under 1,000 hours a year, subject to the long-term part-time rules for the 401(k) side.
Official sources
The IRS explains: “On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.” — Internal Revenue Service, Defined benefit plan, https://www.irs.gov/retirement-plans/defined-benefit-plan
The IRS explains: “A type of defined benefit plan that includes some elements that are similar to a defined contribution plan because the benefit amount is computed based on a formula using contribution and earning credits, and each participant has a hypothetical account.” — Internal Revenue Service, Retirement plans definitions, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-definitions
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk models the owner contribution against the employee cost before an actuary is engaged. See pricing or book a free fit call.
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