As a retirement plan advisor, I help business owners come up with the right mix of employee benefits to attract and retain talent as well as build a secure retirement for themselves and their employees.
Many business owners try to go it alone, but there are so many types of retirement plans beyond traditional defined contribution plans (like 401(k) plans) that busy owners can struggle to keep details straight, let alone know which plan is best for their business.
One option that often raises questions is called a cash balance plan. Cash balance plans are appealing as they give successful business owners a way to save for their future and reap tax benefits today.
Instead of taking home, for example, $200,000 in profit from your business, paying tax on it, then putting it into a brokerage account to save for retirement, a cash balance offers a way to save that $200,000 in a way that’s tax deductible for your business and tax deferred.
It can also offer a great employee benefit, encouraging retention and reinforcing your business as a great place to work.
However, cash balance plans can be confusing due to the difference between how the retirement plan industry markets these plans and business owners’ initial impressions of them.
Cash balance plans are a type of traditional defined benefit plan in which the company makes employer contributions on behalf of all plan participants.
These plans are governed by ERISA and must adhere to specific plan design and plan document requirements set by the law.
What sets these plans apart is a much higher annual contribution limit compared to a traditional 401(k)—especially for older participants. Rather than a set limit by the IRS, the annual limit for a cash balance pension plan depends on the employee’s salary, current age, retirement age/date, and fund balance.
Cash balance plans are generally referred to in account balance terms, i.e., a retiree will have a cash balance of $300,000 at the time of retirement. It’s a hypothetical account until retirement, meaning it’s a promise of a flat dollar amount, regardless of actual contributions, gains, losses.
The employer makes contributions, known as a pay credits, that is a percentage of each employee’s annual salary. The employer then takes on all of the investment risk and must make up for losses to maintain the promised balance at retirement. In that way, you can think of this similar to a bond where a value is set for a future date, regardless of economic factors.
Some consultants marketing cash balance plans talk up the perks and make them sound incredible:
Save more than $200,000 a year! Get amazing tax breaks!
It sounds like a great idea to many owners, until they dig into the details. That’s when they find out you have to make a big commitment to funding that plan and need to rely on a bit more professional oversight and management to avoid running afoul of IRS rules.
These complications often lead business owners to assume the plans are too complicated and burdensome.
The truth, though, is somewhere in the middle. For the right business, cash balance plans can be a great fit and a good complement to a 401(k). The advantages are real—but so are the commitments.
So to help clients make an informed decision, I rely on straight talk about the pros and cons. Here are the three key benefits of cash balance plans—and their tradeoffs.
Benefit:
Cash balance plan contribution limits increase with age. But no matter how old you are, the limits for a cash balance plan are always higher than those for a 401(k). Compare the maximum contributions for 2025:
| 401(k) Profit Sharing & Cash Balance Plans The following table is an example and for illustrative purposes only. |
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| Age | 401(k) Only | 401(k) w/ Profit Sharing | Cash Balance | Total |
| 66-70 | $31,000 | $77,500 | $383,000 | $460,500 |
| 60-65 | $31,000 | $77,500 | $342,000 | $419,500 |
| 55-59 | $31,000 | $77,500 | $280,000 | $357,500 |
| 50-54 | $31,000 | $77,500 | $218,000 | $295,500 |
| 45-49 | $23,500 | $70,000 | $170,000 | $240,000 |
| 40-44 | $23,500 | $70,000 | $132,000 | $202,000 |
| 35-39 | $23,500 | $70,000 | $103,000 | $173,000 |
| 30-34 | $23,500 | $70,000 | $81,000 | $151,000 |
Companies make those contributions on behalf of plan participants, so the amount is tax deductible for the company.
For owners, those tax savings can flow through to their individual tax returns. And like other retirement plans, savings grow tax-deferred, giving plan participants a potentially bigger pool of funds down the road. This can be very appealing to owners who may have neglected their personal retirement savings while focusing on building the business.
It’s also important to note that you can have both a 401(k) and a cash balance plan and can contribute the maximum to both.
The tradeoff: Cash balance plans are a big commitment.
The IRS wants your plan to be in place for at least five to seven years, and it asks that contributions remain similar throughout that time.
It may be possible to change contributions under certain circumstances, but it requires a documented business reason.
What’s more—you have to cover 40% of your workforce, or up to 50 participants. And you likely need to commit to giving covered employees a pay credit of 5% to 7.5% of their annual salary.
These rules make cash balance plans a better fit for small businesses with an owner and a few employees, or for law or medical firms that can cover both partners and lower-paid administrative employees.
Unlike other retirement benefits, where a participant’s account balance can decline, savings in a cash balance plan don’t fluctuate based on investment performance.
Instead, there’s a set interest crediting rate—typically 4% or 5% annually—and participants receive contributions plus that growth when they retire.
To achieve that rate, the plan assets are pooled and managed by professionals like Plancorp, so participants don’t have to pick their own funds, determine their investment risk tolerance, or manage their asset allocation.
The tradeoff: Owners must make up the difference between the interest crediting rate and actual performance.
If the plan’s assets earn more than the crediting rate in a given year, the business owners have to reduce contributions the next year. Conversely, if the plan’s assets fail to deliver the interest crediting rate, the company must make up the difference with additional cash contributions.
For example, if your portfolio is supposed to return 5%, but it has a -10% negative return, the plan’s total balance would be 15% short. That means a $2 million plan would be down $300,000, and you’d have to make up the difference to prevent freezing or limiting benefit amounts and paying much higher Pension Benefit Guaranty Corporation premiums.
In the event your portfolio has a 20% rate of return one year, outperforming its interest crediting rate of 5%, your balance could be $300,000 higher than projected. In that case, employers may have to lower their contributions, which wipes out the big tax deferral you were after.
The solution is for your plan advisor or actuary to invest in a conservative way to target that 5% return. And it’s important that you’re comfortable with your commitment and have the cash flow to support it.
As an advisor, that’s something I pay special attention to. You’ve likely heard the phrase “house poor” to describe what happens when someone pays so much toward their mortgage that they’re feeling the squeeze everywhere else. I don’t want you to feel cash-balance poor.
Plan participants don’t have to worry if they change jobs. Like a 401(k)—and unlike old-school pension plans—you can rollover your plan balance into an IRA.
The tradeoff: The assets are all invested in one account.
Everyone in a cash balance plan has the same crediting rate. That means if one participant is a super aggressive investor and another is conservative, they’re stuck with a single approach and both get the same return.
But a cash balance plan is often something you have in addition to a 401(k) and other investment accounts, where you may have more discretion on investment decisions.
Once you understand these tradeoffs, you can work within the rules to find the right approach for your company.
What makes me excited about cash balance plans is the flexibility they offer. For example, you don’t have to save the max: You take it slow for the first couple of years with a smaller contribution, such as $75,000.
Then, once you understand how the plan works, you can bump up the savings. This approach can help people avoid tax surprises that might affect the company’s cash flow.
And as I said above, if you choose to offer a cash balance plan, you’re not limited to using only that account. You can also offer a 401(k) to manage the costs of contributions on behalf of your employees.
A law firm, for example, could offer a 401(k) to everyone at the firm and then add a cash balance plan only for partners and administrative staff. That would avoid the cost of making large contributions for non-partner attorneys with high salaries.
A qualified plan advisor can take on the burden of sorting out those details. You want someone on your side who understands your goals and your business—both where you’ve been, and where you’re headed.
That way, the advisor can look ahead for ways to improve the plan or spot potential problems. With a good partner in place, proactively advocating for you, a cash balance plan in addition to other types of retirement accounts can indeed be a way to accelerate retirement savings—without exposing you to potential mistakes that undercut their wealth-building potential.
If you would like to discuss how we could help your corporate retirement plan, schedule a meeting with me today. Curious to get a no-obligation review of the fees on your 401(k) plan? Check out this page.