A cash balance plan is a type of defined benefit retirement plan that allows business owners and high-income professionals to contribute significantly more than traditional 401(k) plans – often between $100,000 and $336,000 annually depending on age. These tax-deductible contributions can dramatically reduce current taxable income while building substantial retirement savings.
For business owners who have maxed out their 401(k) and profit-sharing options but still want to shelter more income from taxes, a cash balance plan offers one of the most powerful solutions available under the tax code. The plan combines the high contribution limits of traditional pensions with the transparency and portability that professionals expect from modern retirement accounts.
This guide covers everything you need to know about cash balance plans in 2025 – from contribution limits by age to tax benefits, plan design requirements, and how to determine if this strategy makes sense for your situation.
What Is a Cash Balance Plan?
A cash balance plan is a defined benefit retirement plan that looks and feels like a 401(k) from the participant’s perspective. Each year, the employer credits a percentage of compensation (the “pay credit”) plus a guaranteed interest credit to each participant’s hypothetical account balance.
Unlike traditional pension plans that promise a monthly benefit at retirement, cash balance plans express the benefit as a lump sum account balance. This makes them easier to understand and more appealing to employees who value portability and transparency.
Here is how the mechanics work:
- Pay credits – The employer contributes a defined amount each year, often based on a percentage of salary or a flat dollar amount determined by the plan’s actuary.
- Interest credits – The account grows each year by a guaranteed interest rate specified in the plan document, typically between 4% and 6%.
- Hypothetical account balance – Participants receive annual statements showing their accumulated balance, which grows predictably over time.
- Portable benefits – When participants leave the company or retire, they can roll the balance into an IRA, take a lump sum distribution, or convert to an annuity.
The key distinction from a 401(k) is that cash balance plans are employer-funded and professionally managed. Participants do not make contributions or direct investments – the employer bears the investment risk and responsibility for funding the promised benefit.
How Does a Cash Balance Plan Work?
Cash balance plans operate under a different set of rules than defined contribution plans like 401(k)s. Understanding these mechanics helps business owners evaluate whether this structure fits their goals.
Each year, the plan’s actuary calculates the required employer contribution based on several factors: the promised pay credits, the interest crediting rate, participant ages and compensation, investment returns, and IRS limits. This contribution is tax-deductible as a business expense.
The employer funds the plan through contributions to a trust, which is invested according to an investment policy designed to meet the plan’s obligations. If investments outperform the interest crediting rate, the surplus reduces future employer contributions. If investments underperform, the employer must make up the shortfall.
From the participant’s view, the experience is straightforward. They receive an annual statement showing their account balance, which grows each year by the pay credit plus interest credit. This balance represents what they would receive if they left the company today – though the actual benefit may be subject to a vesting schedule.
Cash Balance Plan Contribution Limits 2025
One of the primary reasons business owners establish cash balance plans is the ability to make substantially larger tax-deductible contributions than 401(k) plans allow. For 2025, maximum cash balance contributions range from approximately $100,000 for younger participants to over $336,000 for those approaching retirement age.
The following table shows estimated maximum contribution limits by age for 2025. These figures assume maximum compensation, standard actuarial assumptions, and combine cash balance contributions with 401(k) and profit-sharing amounts:
| Age | Cash Balance Maximum | 401(k) + Profit Sharing | Total Potential Contribution |
|---|---|---|---|
| 35 | $100,000 | $70,000 | $170,000 |
| 40 | $130,000 | $70,000 | $200,000 |
| 45 | $165,000 | $70,000 | $235,000 |
| 50 | $205,000 | $77,500 | $282,500 |
| 55 | $255,000 | $77,500 | $332,500 |
| 60 | $310,000 | $77,500 | $387,500 |
| 65 | $336,000 | $77,500 | $413,500 |
Note: These are estimates based on standard actuarial assumptions. Actual contribution limits require actuary certification and depend on plan design, interest rates, mortality tables, and individual circumstances. The 401(k) column includes the $23,500 employee deferral limit ($31,000 for those 50+) plus employer profit-sharing contributions.
The lifetime limit for cash balance plans is approximately $3.5 million for 2025. This represents the maximum lump sum benefit that can be paid from the plan, assuming at least 10 years of participation and retirement at age 62 or later.
Cash Balance Plan Tax Benefits
The tax advantages of cash balance plans are substantial and represent the primary motivation for most business owners who establish them. These benefits compound over time, creating significant wealth accumulation opportunities.
- Large tax-deductible contributions – Every dollar contributed to a cash balance plan reduces current taxable income. A 55-year-old business owner contributing $255,000 could save over $100,000 in combined federal and state taxes in a single year, depending on their bracket.
- Tax-deferred growth – Investment earnings inside the plan compound without annual taxation. This allows assets to grow faster than they would in a taxable account.
- Reduces business taxable income – Contributions are deductible as a business expense, lowering both income taxes and potentially self-employment taxes for pass-through entities.
- Combines with other retirement plans – A cash balance plan can be layered on top of a 401(k) and profit-sharing plan, multiplying the total tax-advantaged savings opportunity.
- Creditor protection – Assets held in qualified retirement plans are generally protected from creditors and bankruptcy claims under ERISA.
- Exit strategy benefits – Business owners can use cash balance plans to dramatically increase retirement savings in the years before selling their business or retiring, when income is often highest.
For high-income professionals in combined federal and state tax brackets of 40% or higher, the immediate tax savings alone can offset a substantial portion of plan administration costs.
Cash Balance Plan vs 401(k): Key Differences
Understanding how cash balance plans compare to 401(k) plans helps business owners determine which structure – or combination – best serves their goals.
| Feature | Cash Balance Plan | 401(k) Plan |
|---|---|---|
| Plan Type | Defined Benefit | Defined Contribution |
| 2025 Maximum Contribution | Up to $336,000+ (age-dependent) | $70,000 ($77,500 if 50+) |
| Who Contributes | Employer only | Employee and/or employer |
| Investment Risk | Employer bears risk | Employee bears risk |
| Investment Control | Employer/trustee directed | Participant directed |
| Guaranteed Returns | Yes (interest credit rate) | No |
| Annual Actuarial Certification | Required | Not required |
| Funding Flexibility | Mandatory annual funding | Employer contributions discretionary |
| PBGC Insurance | Usually required | Not applicable |
| Portability | Rollover to IRA at separation | Rollover to IRA at separation |
The two plan types are not mutually exclusive. In fact, combining a cash balance plan with a 401(k) and profit-sharing plan is one of the most effective strategies for maximizing tax-deferred retirement savings. This approach allows business owners to contribute $300,000 to $400,000 or more annually while giving employees access to a familiar 401(k) structure.
Who Should Consider a Cash Balance Plan?
Cash balance plans are not appropriate for every business or professional. They work best in specific situations where the benefits outweigh the costs and administrative requirements.
You may be a good candidate for a cash balance plan if:
- You are a high-income business owner or professional – Earning well above the 401(k) contribution limits and looking for additional tax-advantaged savings opportunities.
- You want to significantly reduce taxable income – The large deductions can help minimize both federal and state income taxes.
- You are behind on retirement savings – Cash balance plans allow catch-up contributions that far exceed what is possible with 401(k)s or IRAs.
- You have stable, predictable income – The mandatory annual funding requirement means cash balance plans work best for businesses with consistent revenue.
- You are over 40 and want to save aggressively – Contribution limits increase with age, making these plans especially valuable for older professionals.
- You are planning to sell your business or retire within 5-10 years – The plan can accelerate savings during peak earning years.
Industries where cash balance plans are most common include medical practices, law firms, dental offices, consulting firms, and owner-operated businesses with a small number of highly compensated principals.
Cash Balance Plans for Small Businesses
Despite their complexity, cash balance plans are particularly well-suited for small businesses. According to industry research, 56% of cash balance plans are sponsored by businesses with 9 or fewer employees. Medical groups represent approximately 35% of all cash balance plan adopters.
Small businesses benefit from cash balance plans in several ways:
- Owner-focused contributions – Plan design can weight contributions toward older, higher-compensated owners while providing meaningful benefits to employees.
- Flexible benefit formulas – Different employee groups can have different contribution rates based on job classification, tenure, or other permitted criteria.
- Competitive advantage – Offering a defined benefit plan can help attract and retain talent, particularly in professional services where employees value retirement security.
- Tax efficiency – The substantial deductions often more than offset the cost of providing benefits to employees.
For solo practitioners or businesses with only owners and no common-law employees, cash balance plans can be even simpler since there are no nondiscrimination testing concerns.
Cash Balance Plan Pros and Cons
Before establishing a cash balance plan, business owners should carefully weigh the advantages against the potential drawbacks.
Advantages
- Large tax-deductible contributions – $100,000 to $336,000+ annually depending on age
- Tax-deferred growth – Investment earnings compound without annual taxation
- Creditor protection – Plan assets are generally protected in bankruptcy
- Guaranteed interest credits – Participants receive predictable account growth
- Combines with 401(k) – Can be layered with other plans for maximum savings
- Portable benefits – Balances can be rolled to an IRA upon separation
- Lifetime limit of $3.5 million – Substantial accumulation potential over time
Disadvantages
- Mandatory annual funding – Contributions are required each year regardless of business profitability
- Actuarial certification required – Plan must be designed and certified by an actuary annually
- Must cover eligible employees – Plans must provide meaningful benefits to all eligible employees, not just owners
- Higher administrative costs – Actuary fees, administration, and PBGC premiums add to ongoing expenses
- Less flexibility than 401(k) – Cannot easily adjust contribution levels year to year
- Overfunding risk – If too much is contributed, reversion taxes and complications can arise
- Minimum 5-year commitment – Plans should generally be maintained for at least five years to meet IRS permanency requirements
Plan Design and Compliance Requirements
Cash balance plans are subject to extensive regulatory requirements that demand professional administration. Proper design and ongoing compliance are essential to maintaining the plan’s tax-qualified status.
Key requirements include:
- Actuarial certification – An enrolled actuary must design the plan, calculate annual contributions, and certify the plan’s funded status each year.
- Minimum funding standards – The plan must be funded to meet minimum requirements under IRC Section 430. Failure to meet funding obligations can result in penalties and excise taxes.
- Nondiscrimination testing – The plan must provide benefits to non-highly compensated employees that are comparable to those provided to owners and highly compensated employees.
- Annual reporting – Form 5500 must be filed annually with the Department of Labor, along with actuarial reports and participant disclosures.
- PBGC coverage – Most cash balance plans must pay premiums to the Pension Benefit Guaranty Corporation, which insures participant benefits. Professional service firms with 25 or fewer participants may be exempt.
- Plan document and amendments – The plan must be maintained with a current written document that complies with all applicable laws and regulations.
Given these requirements, cash balance plans require a team of professionals including an actuary, third-party administrator, investment advisor, and tax advisor working together to ensure proper operation.
Combining Cash Balance with 401(k) for Maximum Savings
The most effective retirement savings strategy for high-income business owners often involves combining a cash balance plan with a 401(k) and profit-sharing plan. This layered approach maximizes total tax-advantaged contributions.
Here is how the combination works for 2025:
- 401(k) employee deferrals – Up to $23,500 ($31,000 if age 50 or older, with additional catch-up for ages 60-63)
- Profit-sharing contributions – Up to 25% of compensation, with total 401(k) plan contributions capped at $70,000 ($77,500 with catch-up)
- Cash balance contributions – An additional $100,000 to $336,000+ depending on age
Consider a 55-year-old physician who owns her practice and earns $400,000 annually. She could contribute:
- $31,000 in 401(k) deferrals (including catch-up)
- $46,500 in profit-sharing contributions
- $255,000 in cash balance contributions
- Total: $332,500 in tax-deductible retirement savings
At a combined federal and state tax rate of 45%, this strategy would reduce her current-year tax bill by approximately $150,000 while building substantial retirement assets.
Frequently Asked Questions About Cash Balance Plans
What is a cash balance plan?
A cash balance plan is a type of defined benefit retirement plan that expresses benefits as a hypothetical account balance rather than a monthly pension payment. The employer credits each participant’s account with a pay credit (typically a percentage of salary) plus an interest credit each year. Despite being a defined benefit plan, it looks and feels like a 401(k) from the participant’s perspective.
How much can I contribute to a cash balance plan in 2025?
Maximum contributions depend on your age, compensation, and plan design. For 2025, contributions can range from approximately $100,000 for a 35-year-old to over $336,000 for someone age 65. The lifetime limit is approximately $3.5 million. Actual amounts require actuary certification based on your specific circumstances.
Can I have both a 401(k) and a cash balance plan?
Yes. Combining a cash balance plan with a 401(k) and profit-sharing plan is one of the most effective strategies for maximizing retirement savings. This approach can allow total contributions of $300,000 to $400,000+ annually, depending on age and compensation.
What is the lifetime limit for a cash balance plan?
The lifetime limit – meaning the maximum lump sum benefit that can be paid from the plan – is approximately $3.5 million for 2025. This assumes at least 10 years of participation and retirement at age 62 or later. The limit is indexed and adjusts annually based on interest rates and mortality assumptions.
Who should consider a cash balance plan?
Cash balance plans work best for high-income business owners and professionals over age 40 who have stable income, want to reduce taxable income significantly, and can commit to mandatory annual funding. They are particularly popular among medical practices, law firms, and consulting businesses.
How is a cash balance plan different from a 401(k)?
The primary differences are contribution limits (cash balance allows much higher amounts), funding source (employer-only vs. employee contributions), investment risk (employer bears risk in cash balance), and administration requirements (cash balance requires annual actuarial certification). Both types of plans allow tax-deferred growth and rollovers to IRAs.
What happens to my cash balance plan if I leave my company?
When you leave or retire, you can typically roll your vested cash balance into an IRA or another employer’s qualified plan. You may also be able to take a lump sum distribution (subject to taxes and potential penalties if under age 59½) or convert the balance to a lifetime annuity.
Are cash balance plans good for small businesses?
Yes. Over half of all cash balance plans are sponsored by businesses with 9 or fewer employees. Small businesses benefit from the ability to weight contributions toward older owners while providing meaningful benefits to employees. For solo practitioners with no employees, administration is even simpler since nondiscrimination testing is not required.
Work With Dimov Tax on Your Cash Balance Plan
A cash balance plan offers high-income business owners one of the most powerful tools for building retirement wealth while reducing current taxes. With contribution limits far exceeding those of 401(k) plans and the ability to accumulate up to $3.5 million in tax-advantaged savings, these plans deserve serious consideration from any business owner earning above the standard retirement plan limits.
However, cash balance plans require careful design, professional administration, and ongoing compliance management. The mandatory funding requirements and actuarial complexity mean these plans are not set-it-and-forget-it solutions.
At Dimov Tax, we help high-income business owners evaluate whether cash balance plans fit their financial situation and coordinate with actuaries and administrators to implement plans that maximize tax benefits. Whether you are exploring a cash balance plan for the first time, looking to optimize an existing plan, or need guidance on combining multiple retirement strategies, our team can help craft your financial plan.
Contact Dimov Tax today to discuss how a cash balance plan could fit into your long-term tax and retirement planning strategy.