High‑Contribution Opportunities with Cash Balance Plans
Done right, a Cash Balance (CB) plan—often paired with a 401(k)—can enable six‑figure, deductible contributions per owner, with predictable, age‑aware benefits and pre‑tested compliance. CB plans credit notional “pay credits” and “interest crediting,” but they remain defined benefit plans subject to funding rules—so design, funding policy, and testing matter.
Book a 15‑minute Fit Check
Request a contribution range
How a Cash Balance plan works
A CB plan credits each eligible participant with a pay credit (e.g., a flat dollar or % of pay) plus an interest credit (fixed rate, Treasury‑linked, or market‑based). These credits accumulate in a hypothetical account—but the plan is still a defined benefit plan with an actuarially determined liability and required funding range.
- Design levers: pay credits by class (owner/associate/staff) or age/service bands; interest crediting fixed vs. Treasury/market‑based.
- Governance: you’ll have a formal plan document, a funding policy, and ongoing actuarial valuations (Schedule SB; AFTAP certifications).
- Exit aware: freeze/terminate options, rollover of benefits, and timeline planning are modeled in advance.
Who these plans fit best
- Profitable firms with stable cash flow and predictable owner income targets.
- Owners looking for six‑figure deductible contributions—especially age 45+.
- Groups where owners skew older than staff (age‑weighted designs are efficient).
- Multi‑owner practices that want fair allocations and clean nondiscrimination testing.
Contribution potential (with 401(k))
Total owner contributions often land in the low‑ to mid‑six figures when a CB plan is coordinated with a 401(k). Exact ranges depend on age, pay, headcount, design, and funding policy—so we model scenarios up front:
- Owner age ~45: frequently ~$120k–$180k across CB + 401(k)*
- Owner age ~52: frequently ~$180k–$260k across CB + 401(k)*
- Owner age ~60: frequently $250k–$300k+ across CB + 401(k)*
*Illustrative ranges only. Your figures will vary—request a PSI feasibility to see owner vs. staff value and testing.
Funding ranges & tax timing
- Funding corridor: each year has a minimum and maximum deductible funding amount—set in policy to fit cash flow.
- Tax timing: DB plans can generally be adopted and funded by the business tax filing deadline (including extensions) for that plan year—coordinate with your CPA.
- Flexibility: policy can target the middle of the range for stability, with room to “top‑off” toward the max when profits are strong.
Pairing with a 401(k): testing & staff cost
Most CB plans are paired with a safe harbor 401(k) + profit sharing. We coordinate combined testing to pass coverage and nondiscrimination while keeping staff cost fair and predictable.
- Design by class: owner, associate, staff; or age/tenure bands.
- Gateway rules & HCE/NHCE: modeled in advance—no surprises at year‑end.
- Clean admin: one‑pass feasibility includes owner vs. staff value, staff cost caps, and the testing exhibits CPAs want.
Risk, investments & interest crediting
The biggest lever in CB risk management is how assets are invested relative to the plan’s interest crediting:
- Fixed rate crediting (e.g., 4–5%): invest to match the rate and reduce volatility, or expect a mismatch.
- Treasury‑linked or market‑based crediting: can align the liability with market returns to dampen funded‑status swings.
- Adopt a Funding & Investment Policy: put targets, ranges, and roles in writing (and follow them).
Implementation timeline (typical)
- Fit Check (15 minutes): goals, census, feasibility scope.
- Feasibility: owner targets, staff cost, interest credit, combined testing with 401(k).
- Decision & docs: select design; adopt plan; funding & investment policy.
- Onboarding: calendar contributions; coordinate with CPA/recordkeeper; staff notices.
- Admin & review: annual testing, funding review, and tune‑ups; exit modeling if needed.
Common pitfalls to avoid
- Skipping feasibility—then discovering staff cost or testing problems late.
- Interest crediting that doesn’t match the investment policy (funded‑status volatility).
- Missing combined‑plan coordination with the 401(k) (gateway/coverage surprises).
- Assuming “set and forget”—CB is DB: fund within the range and calendar your deadlines.
Plan Sponsor Action Checklist
Quick FAQ
Are Cash Balance accounts real “balances” like 401(k)s?
No. They’re notional—the plan is a defined benefit arrangement with actuarial funding, even though statements show hypothetical accounts.
Can we adopt a CB plan after year‑end?
Often yes—DB plans can generally be adopted by the business tax filing deadline (with extensions) for the prior plan year. Coordinate timing with your CPA and 401(k) testing.
Do we need a safe harbor 401(k)?
Most designs pair CB with safe harbor + profit sharing to pass combined testing efficiently. We’ll model options so staff cost stays fair and predictable.
What if profits drop?
You have a funding range and can adjust toward the minimum; if needed, freezes/terminations can be modeled and executed with proper process.
Important: This is educational, not tax or legal advice. Cash Balance plans are defined benefit plans subject to ERISA/IRS rules, actuarial funding, and annual testing. Consult your advisors.