The Short AnswerA cash balance plan is a defined benefit pension plan that expresses each participant's benefit as an account balance. Because contributions are set by an actuary to fund a target benefit, business owners in their 40s to 60s can often contribute $100,000 to $300,000+ a year pre-tax, on top of a 401(k).
How Does A Cash Balance Plan Work?
Each year the plan credits every participant with a pay credit (a percentage of salary or a flat amount) and an interest credit. An actuary calculates the contribution needed to fund those credits. Because older owners are closer to retirement, the allowable contribution rises with age, which is why the plan fits owners in their 40s, 50s and 60s most often.
Who Is A Cash Balance Plan Right For?
- Consistent profits and an owner who wants to shelter six figures a year
- Owners in their 40s or older, often professionals such as physicians, attorneys and consultants
- A small staff, since employees must also receive benefits
- An owner willing to fund it for at least several years
Can You Have A Cash Balance Plan And A 401(k)?
Most cash balance plans sit alongside a 401(k) with profit sharing. The 401(k) covers the elective deferral and profit sharing; the cash balance plan adds the large age-weighted contribution on top. A third-party administrator designs both so they pass nondiscrimination testing together.
How Is Cash Balance Plan Money Taxed When It Comes Out?
The contributions are deducted today, and the taxable part of a distribution is generally taxed as ordinary income when it comes out. The same balance can carry very different federal tax depending on how it is withdrawn. See the spread on your own plan and read about retirement tax planning.
How Is A Cash Balance Plan Different From A Traditional Pension?
The IRS says cash balance plans "base benefits on a hypothetical account balance, increased with principal credits, and adjusted with interest credits." They are defined benefit plans, so the pension funding rules apply, and an enrolled actuary determines the funding levels and signs the Schedule SB.
What Are The 2026 Limits For A Cash Balance Plan?
Federal law caps the annual benefit a defined benefit plan can provide. For 2026 the IRS raised that cap from $280,000 to $290,000 in Notice 2025-67. The cap limits the annual benefit, not the contribution, and the statute sets it at the lesser of a dollar amount and 100 percent of the participant's average compensation for the high 3 years, so pay matters. The annual compensation limit, which caps the pay a plan can take into account, is $360,000 for 2026.
A 401(k) with profit sharing has its own 2026 limits: $24,500 of elective deferrals, and $72,000 under section 415(c) for defined contribution plans.
What Does The Employer Have To Fund Each Year?
Minimum-funding rules apply each plan year. Under section 412, the employer makes contributions that are not less than the minimum required contribution determined under section 430, and the IRS says an excise tax applies if the minimum contribution requirement is not satisfied. The IRS adds that benefits can't be retroactively decreased, and that a sponsor of a defined benefit plan can have other retirement plans.
What Do Participation And Coverage Rules Mean For Employees?
The tax code tests who a plan covers. One coverage test in section 410(b) asks whether the plan benefits at least 70 percent of employees who are not highly compensated employees. The minimum participation rule in section 401(a)(26) generally asks that the plan benefit at least the lesser of 50 employees or the greater of 40 percent of all employees or 2 employees. When the business has eligible employees, participation and coverage rules can require benefits beyond the owner, and the actuary and administrator run those tests for the plan.
How Does California Treat Cash Balance Plan Income?
The Franchise Tax Board says "The California treatment of pension and annuity income is generally the same as the federal treatment." California's 2025 rate schedules reach 12.3%, with an additional 1% on taxable income over $1,000,000, so the year a distribution is taken and the other income in that year can affect the result. For pension or annuity payments from a qualified employer plan, the IRS says all or some portion may be taxable unless the payment is a qualified distribution from a designated Roth account.
What Are The Risks And Trade-Offs Of A Cash Balance Plan?
- A multi-year commitment. Minimum-funding rules apply each year, and benefits can't be retroactively decreased.
- Costs beyond the contribution. An enrolled actuary and a third-party administrator work on the plan each plan year.
- Benefits for employees. Coverage and participation rules can require benefits beyond the owner.
- Limits on access. The IRS says a defined benefit plan generally may not make in-service distributions to a participant before age 59½.
- An exit that needs planning. Ending a plan has its own steps and its own tax questions.
What Happens When A Cash Balance Plan Ends?
The IRS says an employer can terminate a plan for various reasons, including bankruptcy, merger or simply voluntarily terminating it. When a plan terminates, the accrued benefits of all affected employees must become 100% vested. Assets are then distributed to participants and beneficiaries, and the tax that follows depends on how the money is taken. The retirement tax planning page and the Second Bill calculator show how much that choice can matter.
What Is Useful To Have Ready For A First Call?
The first call is 30 minutes on Zoom. These items make it faster:
- Your last two years of business tax returns and your own W-2 pay
- A list of employees with ages, pay and hire dates
- Any current retirement plan documents, including your 401(k) and its provider
- The name of your CPA, who works alongside Tyler on the plan
What Does This Look Like For Ventura County Employers?
The Department of Labor publishes Form 5500 filings for retirement plans. In the 2024 filings, at least 115 employers in Ventura County cities sponsored a small defined benefit or cash balance plan (25 or fewer participants and a target normal cost of at least $100,000). The median annual target normal cost across those plans was $233,899, the actuary's measure of the cost of benefits earned in the year, and the median plan was 5 years old. Employers filed under Westlake Village, a Los Angeles County city, are not in the 115.
Plan design for an owner here runs through your CPA and an actuary, with meetings on Zoom or in person near you. Read about planning for Ventura County owners.
Common Questions
What is the difference between a cash balance plan and a 401(k)?
A 401(k) is a defined contribution plan with annual contribution caps that are the same regardless of age. A cash balance plan is a defined benefit plan where an actuary sets the contribution to fund a promised benefit, so older owners can contribute far more.
Can I stop contributing to a cash balance plan?
Minimum-funding rules apply each year the plan is active, and plans are generally expected to run for several years. A plan can be amended or frozen, and benefits already earned can't be retroactively decreased. Design it around profits you expect to be consistent.
Do I have to include employees?
When the business has eligible employees, participation and coverage rules can require benefits beyond the owner. The cost depends on staff size, pay and plan design, so it has to be modeled.
How much can I contribute to a cash balance plan?
An actuary sets the contribution from the plan's design, the participants' ages and pay, and the funding rules. For 2026 the federal limit on the annual benefit under a defined benefit plan is $290,000, which limits the benefit and not the contribution. Your own numbers come from the actuary.
What happens to a cash balance plan if I sell my business?
A sale can lead to the plan being terminated, and the IRS says an employer can terminate a plan for various reasons, including merger. When a plan terminates, the accrued benefits of affected employees must become 100% vested. Bring your actuary, attorney and CPA in before the sale agreement is signed.
