Cash Balance Pension Plans: A Bigger Lever for Business Owners Behind on Retirement Savings

A 401(k) has a ceiling, and for a profitable owner in their fifties, that ceiling can arrive well before the tax bill stops stinging.

Business owners who have maxed out a 401(k) with profit sharing often ask the same thing: is there a way to set aside more, with a deduction, before retirement? One answer is a cash balance plan, a type of defined benefit pension that can allow considerably larger deductible contributions than a defined contribution plan alone.

It also comes with obligations that a 401(k) does not carry. Understanding both sides is the point of this post.

Schedule a complimentary consultation with Ben Loughery.

How a cash balance plan is built

A cash balance plan is a defined benefit plan that presents each participant with a hypothetical account balance. Each year, that balance is credited with two things:

• A pay credit, usually a set percentage of compensation
• An interest credit, which can be a fixed rate or a variable rate tied to an index, as the plan document specifies

The assets behind those promises sit in one pooled fund rather than in individual accounts. The employer carries the investment risk: if the fund earns less than the interest credit, the employer may need to contribute more to close the gap, and if it earns more, future required contributions can shrink.

Where the larger contributions come from

The contribution is not a flat dollar limit the way a 401(k) deferral is. An enrolled actuary calculates it each year based on the participant's age, compensation, and the plan's design. For 2026, the IRS limit on the annual benefit under a defined benefit plan is $290,000, and the cap on compensation that can be counted is $360,000, per IRS Notice 2025-67.

Because the plan is funding toward a future benefit, an older owner has fewer years to build it, which typically means larger annual contributions than a younger owner would see. This is why cash balance plans tend to appeal to owners in their fifties and sixties with steady, high income.

What the plan asks of the business

The obligations are what separate this from a discretionary 401(k) match.

• Funding is required each year. The actuary sets a range, and the minimum is largely binding whether the business had a strong year or a weak one.
• Employees generally have to be covered. Nondiscrimination rules require meaningful benefits for rank-and-file staff, not only owners, so the cost of staff contributions offsets part of the owner's tax benefit.
• The plan is expected to be permanent. Ending a plan shortly after adopting it without a valid business reason can draw IRS scrutiny.
• Administration costs more. An actuary and a third-party administrator are part of the arrangement.

A hypothetical illustration

Consider Elena, a fictional 56-year-old who owns a dental practice with six employees and has been contributing the maximum to a 401(k) with profit sharing. Her income has been steady for years, and she hopes to sell or step back in her mid-sixties. A cash balance plan alongside her 401(k) might let her direct a substantially larger amount into a deductible retirement account each year than the 401(k) alone would allow.

The trade-off is that her practice would owe the actuary-determined contribution each year, plus contributions for her staff. If a downturn cut revenue, the funding obligation would still stand. Elena is hypothetical, and a full analysis would require an actuary's projection.

Questions worth exploring with an advisor

If you own a business and are weighing this, the following questions tend to frame the discussion:

• How stable has the practice's cash flow been, and how confident are you in the next five to ten years?
• What would the cost of covering employees look like next to the tax savings?
• How would the plan interact with a possible sale or transition of the business?
• What happens to the account at retirement, including the option to roll a lump sum into an IRA?
• Does the plan fit alongside your other retirement savings and your overall tax picture?

Is a larger deduction worth a larger commitment?

For some owners, the answer is yes. For others, the flexibility of a simpler plan is worth more than the extra deduction. The decision usually comes down to cash flow predictability, workforce size, and how many years remain before retirement.

A careful comparison, with an actuary's numbers in hand, is the best way to see which side of that line a given business falls on.

Schedule a complimentary consultation with Ben Loughery.

Ben Loughery is a CERTIFIED FINANCIAL PLANNER® and founder of Lock Wealth Management, based in Atlanta, GA. He specializes in retirement income planning, tax optimization, and helping clients build financial confidence at every stage of life.

This post is educational and is not tax or legal advice. Plan design and eligibility depend on individual circumstances; consult a qualified professional.