Cash Balance Plan FAQ

A Cash Balance Plan is a type of Defined Benefit Plan (IRS §401(a)) that allows for large, tax-deductible contributions and guaranteed retirement benefits.

Think of it as a hybrid between a traditional pension and a 401(k). The plan is designed for you and your employees to earn a benefit each year which is normally some percentage of earned income such as W-2 pay – these are known as pay credits. Those contributions then grow at a guaranteed rate of return (called an interest credit), providing predictable growth year after year. 

At retirement, the accumulated balance can be distributed as either a lump sum or lifetime annuity, giving flexibility in how you or your employees access the benefit. 

In short, a Cash Balance Plan allows business owners to strategically accelerate their retirement savings and reduce taxable income, all while building a competitive benefit program that helps attract and retain key talent.

These plans work especially well for: 

• Business owners and self-employed professionals 
• Firms with fewer than 10 employees
• Owners who are typically older than their employees 
• Those age 50+ with high, stable or increasing income 
• Professional practices (medical, legal, accounting, engineering, consulting) 

If you want to catch up on retirement savings quickly or reduce taxable income, a Cash Balance Plan is often a great fit.

Key benefits include:

• Large tax-deductible contributions (often $200k-$400k+/yr depending on age/income) 
• Tax-deferred growth 
• Assets protected from creditors 
• Flexible plan design 
• Often paired with a 401(k) for maximum savings 

Unlike a 401(k), your retirement benefit is guaranteed — and backed by a funding requirement.

Each participant receives: 

1. Pay Credits — e.g., flat dollar amount or % of pay (e.g., $1,000 per year or 3% of compensation) 
2. Interest Credits — fixed (e.g. 5%) or indexed (like Treasury rates) 
3. Actuarial conversion — determines benefit if taken as annuity vs. lump sum 

Plans are funded by the employer, not employees.

A 401(k) is a Defined Contribution plan — meaning the contribution is known, but the benefit depends on investment performance. Employees typically contribute their own money, choose investments, and bear market risk.

A Cash Balance Plan is a Defined Benefit plan — meaning the benefit is promised and guaranteed by the employer. Each account grows through pay credits (employer-funded contributions), and interest credits (a guaranteed growth rate set by the plan).

Many businesses offer both to stack tax benefits.

Both Cash Balance Plans and traditional pension plans fall under the Defined Benefit category, meaning the employer is responsible for funding the promised benefit. The key difference lies in how the benefit is communicated and tracked. 

A traditional pension plan defines the benefit as a monthly payment at retirement (for example, “$4,000 per month for life”) — typically based on salary and years of service. The benefit formula can be complex, and employees often don’t see a clear picture of their growing value over time. 

A Cash Balance Plan, expresses the benefit as a hypothetical individual account balance — showing each participant exactly how much has been credited and how it grows annually. This format makes it easier for employees to understand and easier for employers to communicate as part of a modern retirement package.

Cash Balance contributions depend on your age, compensation and years until retirement.

Approximate contribution potential assuming the IRS maximum considered pay ($360,000 indexed in 2026):

• Age 40: ~$110,000
• Age 50: ~$190,000
• Age 60: ~$325,000

In many cases, this is in addition to maxing out a 401(k). Read more: How Much Can I Contribute to a Cash Balance Plan?

IRS §415(b) limits the benefit payable from a defined benefit plan.

For 2026, the maximum benefit is:

• $290,000 per year as a lifetime annuity at normal retirement age
• Roughly $3.5M lump sum (if age 62+ with 10 years of participation)

Yes — in fact, most business owners pair them together. Cash Balance Plans aren’t designed to replace your 401(k) or IRA, they’re meant to complement them.

Stacking the plans lets you maximize annual tax deductions and wealth accumulation.

Yes. Unlike 401(k)s, these plans require minimum annual funding — similar to a pension. However, plans can be designed with flexibility and contribution ranges to fit cash flow needs. 

Absolutely! Cash Balance Plans can use a vesting schedule, typically no more than three years. Many plans use “cliff” vesting, where you’re 100% vested after three years, though some use graded schedules with partial vesting sooner. 

When an employee terminates employment before completing the required vesting service for 100% vesting, any non-vested amount is “forfeited” and may be used to offset or reduce the employer’s future contributions.

These are the first steps you should take:

1. Work with an actuary to design the plan 
2. Establish a Trust for plan investments with your financial advisor
3. Implement funding policy and investments

Allow 4-6 weeks for the plan to be fully set up. 

Under the SECURE Act, plans must be: 

• Adopted by the business tax filing deadline (including extensions) 
• Funded by that deadline 

It’s best to start setup at least 4-6 weeks before your filing date.

The pros are well known and often highlighted, but it’s important to remember that large tax-deductible contributions and flexible plan design do carry the disadvantage of minimum required contributions.

You’re a strong candidate if you:

• Have a small team or professional practice
• Have consistent, high income
• Are age 35+ (especially 45-65)
• Want to reduce taxes significantly 

Already max 401(k)/IRA and want more

Assets are pooled and employer-directed, not individually invested like a 401(k). 

Plans typically use conservative-to-moderate portfolios (3-7% target) to support interest crediting and manage funding volatility. 

You’ll work with both an actuary and investment advisor.

The Pension Benefit Guaranty Corporation (PBGC) is a federal agency created under ERISA in 1974 to protect participants in private-sector defined benefit (DB) plans. If a covered plan terminates without enough assets to pay promised benefits, the PBGC steps in to provide guaranteed payments up to legal limits.

Because a Cash Balance Plan is a type of defined benefit plan, it’s often covered by PBGC insurance. However, not every plan qualifies. 

Some professional service firms — such as medical, legal, or accounting practices with fewer than 25 active participants — are exempt from PBGC coverage. In those cases, the plan’s benefits are not insured but the employer also avoids annual PBGC premium payments. 

Your actuary can confirm whether your plan qualifies for coverage and help you understand any associated filing or premium requirements.