Cash Balance Plan
What is a cash balance plan?
A cash balance plan is a retirement plan for a business. It is a type of defined benefit plan, which means the plan promises a defined benefit at retirement rather than depending only on what was contributed and how investments performed.
Each participant has a hypothetical account. The account grows each year from two sources: a contribution credit from the employer and an interest credit set by the plan. The money is invested by the plan, not by each participant, and the employer bears the investment risk.
How is it different from a 401(k)?
A 401(k) is a defined contribution plan. You and the business contribute up to set limits, you choose the investments, and the final benefit is whatever the account grows to.
A cash balance plan works the other way. The plan defines the benefit first, and an actuary calculates the contribution needed to fund it. Because the benefit is defined, the contributions can be much larger than a 401(k) allows, especially for older owners with fewer years left to save.
Many owners pair the two. The 401(k) covers the base. The cash balance plan adds the larger layer on top.
Who does it fit best?
- Closely held businesses with a small number of owners
- Owners with strong, steady income who want to cut the current tax bill
- Owners who want to set aside a large amount each year toward retirement, often more than $100,000
- Owners who are comfortable funding the plan over 3 to 5 years, including for eligible employees
- Professional practices, boutique law firms, medical and dental practices, CPA firms, construction and trade businesses, real estate businesses with earned income, and similar closely held companies
How does it work?
- Design. An actuary and a Third Party Administrator (TPA) design the plan around your business: your age, your income, your employees, and your goals.
- Feasibility. Before anything is adopted, a feasibility study shows what you could contribute, what it would cost for the team, and how much of the benefit would go to the owners.
- Adoption. If the numbers work, the plan is adopted with a written plan document.
- Funding. Each year the business contributes the amount the actuary calculates. Contributions are generally tax deductible to the business.
- Administration. The TPA administers the plan, handles the annual testing and filings, and keeps the plan in compliance.
- Payout. At retirement, the participant can generally take the benefit as a lump sum or as a monthly income for life, depending on the plan design.
What could it allow an owner to do?
For the right business, a cash balance plan may allow owners to put away far more toward retirement on a pre tax basis than a traditional plan allows, often more than $100,000 per year, while lowering the current tax bill. In the examples we have studied, the great majority of the benefit can go to the owners while the cost for the team stays manageable. Your numbers will depend on your age, your income, and your employees, and a feasibility study shows them before you commit to anything.
What does it cost?
- Contributions for eligible employees, as required by the plan design and the law
- Annual administration by the TPA
- Actuarial work each year
- A funding commitment of 3 to 5 years at a minimum, with flexibility year to year
That last point matters. A cash balance plan is flexible. You can skip a bad year, and the design can be adjusted when income dips. What it asks for is a commitment of 3 to 5 years at a minimum, so the plan has time to work. A feasibility study should test how the plan holds up in a normal year and in a slower year.
What should you watch out for?
- The plan must cover eligible employees, not only the owners. The design manages the cost, but it cannot eliminate it.
- The plan asks for a 3 to 5 year funding commitment at a minimum. It is flexible year to year, and a bad year can be skipped, but it is not a one year plan.
- The plan needs professional design and annual administration. This is not a do it yourself plan.
- Your CPA and your attorney should review the design before you adopt it.
Common questions
Do I have to offer it to all my employees?
The plan covers eligible employees under rules set by the plan document and the law. A good design directs most of the benefit to the owners while keeping the team cost fair and manageable. The feasibility study shows the exact split for your business.
Can I have a cash balance plan and a 401(k)?
Yes. Many businesses run both. The 401(k) is often the base layer and the cash balance plan adds the larger layer.
What if my income drops one year?
The plan is flexible. A bad year can be skipped, and the design can be adjusted when income dips. What matters is the longer view: a feasibility study should look at your income over several years, not only your best year, and the design should fit the business you actually run.
How do I know if it works for my business?
A complimentary actuarial feasibility study, done as part of your Wealth Architecture Review, shows your numbers before you adopt anything. If the numbers do not work, you will know that before you spend anything.
Is this tax advice?
No. We provide education and insurance based strategies, and we coordinate with your CPA on the tax side. Your CPA should review any plan before you adopt it.
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Content on this page is for education only and does not constitute financial, tax, or legal advice. Please consult your tax advisor or attorney regarding your specific situation.
