Cash Balance Plans for Business Owners: Your Questions Answered
In this article, we provide a background on Cash Balance plans and answer some of the most common questions surrounding this plan design.
Cash Balance Plans for Business Owners: Your Questions Answered
In this article, we provide a background on Cash Balance plans and answer some of the most common questions surrounding this plan design.
What is a Cash Balance Plan?
A Cash Balance plan is a Defined Benefit retirement plan that combines the security of a Defined Benefit plan with the transparency of a Defined Contribution plan. They offer a great way for high-income participants to increase their retirement savings while reducing the risk often associated with more traditional Defined Benefit plans.
What is the Difference Between Defined Benefit and Defined Contribution?
In general, Defined Benefit and Defined Contribution plans have these major differences:
Defined Benefit: Retirement plans that provide a guaranteed benefit in retirement. Employers shoulder the investment risk, and the benefit often increases based on factors such as salary and years of service. A traditional pension plan is one example.
Defined Contribution: Retirement plans that do not provide guaranteed payments in retirement. Participant shoulders investment risks in general by contributing to a specified account, which grows with time. 401(k) plans are common Defined Contribution plans.
How do Cash Balance Plans Work?
Unlike a 401(k) plan, which grows from contributions and earnings, Cash Balance benefits increase each year through imputed employer contributions and earnings. Frequently, these imputed contributions and earnings are referred to as a "credit." Credit comes in two types:
Pay credit: A set percentage of a participant’s compensation or a fixed dollar amount paid into the account by the plan sponsor.
Interest credit: Interest credit is further divided into two types: fixed-rate interest credit and variable-rate interest credit.
Fixed-rate interest credit: A fixed-rate credit, specified in the plan document, is tied to an index rate, such as a treasury rate. While fixed-rate plans may seem straightforward, they also introduce challenges for plan sponsors, as the fixed crediting rate often doesn’t align with actual investment returns, creating a mismatch between asset growth and account balances.
Variable-rate interest credit: Per the plan document, the interest credit is equivalent to the rate of return on the underlying plan assets. As a result, they are more common as they align the growth of the account balance with the growth of the assets directly, minimizing risk and volatility to the plan sponsor. Variable-rate plans are also referred to as Market-Based Cash Balance plans.
Regardless of crediting type, the result is a guaranteed retirement benefit, either as a lump sum or converted into a lifetime annuity, based on the employee’s tenure, earnings, and the plan’s pay and interest credits.
What is a Market-Based Cash Balance Plan?
A Market-Based Cash Balance is a Cash Balance plan that uses a variable-rate interest credit to grow the account. Market-Based features are increasingly popular with sponsors because they align the growth of the plan assets with the interest credit, minimizing risk and volatility for plan sponsors.
Important Update: On January 14th, 2026, the Board of the FASB took a big step towards clarifying the accounting treatment for Market-Based Cash Balance plans. Once finalized, these steps will mean that well-managed daily-valued Market-Based Cash Balance plans will be immune from the accounting risk and volatility typical of defined benefit pension plans.
To learn more about this update, see October Three’s commentary on the FASB’s approved recommendations, including the issue, proposed solution, and current status.
Pros and Cons of Cash Balance Plans
Cash balance plans offer employees a more flexible and accelerated path to retirement readiness while plan sponsors benefit from significant tax advantages, predictable costs, and reduced risk.
Pros of Cash Balance Plans:
Tax-deferred status: As qualified retirement plans, cash balance plans are tax-deferred. Participants do not pay taxes on their retirement savings until they make withdrawals, and employers’ contributions are tax-deductible when made, reducing the organization’s taxable income.
Larger contributions/accruals: Cash balance plan contribution limits increase as participants age and earn more, enabling participants to increase their retirement savings while often reducing their annual tax burden.
Increased visibility: Cash balance plans enable participants to see their balance and watch as their account grows each year, delivering a similar participant experience as a 401(k) plan.
Flexible payout options: Participants can choose a lump-sum payout that can be rolled over into IRAs or other retirement plans for continued tax-deferred growth, or they can convert some or all of their balance into a lifetime annuity.
Greater protection for participants: Cash balance plans also benefit from enhanced protection under the Employee Retirement Income Security Act (ERISA), to safeguard participants' accrued benefits from creditors. Plans are also often insured by the Pension Benefit Guaranty Corporation (PBGC), further enhancing their reliability if a plan sponsor fails to meet its financial obligations.
Cons of Cash Balance Plans:
No self-directed investments: While participants can accumulate significant benefits within a cash balance plan, they cannot decide how the assets backing those benefits are invested. Instead, the plan sponsor makes the investment decisions, and the returns generated are shared among all plan participants.
Limited flexibility to change contribution levels: A key limitation of Cash Balance plans is that plan sponsors are required to make specified annual contributions. However, many plan sponsors may amend the plan every three to four years, allowing participants to modify their benefit accrual.
Accessibility of funds: Unlike 401(k) plans, Cash Balance plans generally do not allow for in-service withdrawals. Withdrawal timing is limited to a distributable event, such as retirement, termination, death, disability, or the participant reaching a specified age, when the plan may allow them to access their account balance.
Costs: The admin costs for a Cash Balance plan can be more than those of a Defined Contribution plan. For instance, an actuary is required for a Cash Balance plan. Employers should consider these additional expenses as part of the overall benefits package offered to employees.
Additional rules: Cash Balance plans come with their own set of rules and restrictions, which require an actuary to ensure compliance with IRS laws and regulations.
Max Cash Balance Contribution Limits for 2026
Age | 401(k) Elective Deferral | Profit-Sharing | Max Cash Balance Contributions | Combined Plan Total |
35 | $24,500 | $47,500 | $97,000 | $169,00 |
40 | $24,500 | $47,500 | $124,000 | $196,000 |
45 | $24,500 | $47,500 | $159,000 | $231,000 |
50 | $32,500 | $47,500 | $204,000 | $284,000 |
55 | $32,500 | $47,500 | $262,000 | $342,000 |
60 | $35,750 | $47,500 | $336,000 | $419,250 |
65 | $32,500 | $47,500 | $349,000 | $429,000 |
Who Is a Cash Balance Plan Best For?
Cash Balance plans can offer significant tax savings and support long-term retirement goals, but they aren’t for everyone.
Generally, Cash Balance plans are the best fit for the following three groups:
Professional services: CPAs, lawyers, doctors, IT consultants, etc.
Owner-only businesses
High earners with consistent income
Comparing a Cash Balance Plan to a 401(k)
Both plan types serve distinct purposes. The best solution for many companies is to use both plans together to provide a flexible retirement accumulation strategy that can more effectively meet the diverse needs of an organization than either plan could on its own.
For a closer comparison, see our article on Cash Balance plans vs. 401(k) plans.
Can S Corp Have a Cash Balance Plan?
The short answer is yes. In fact, it is relatively common. However, whether a Cash Balance plan is appropriate for your organization will depend on its income, whether or not you have employees, the stability of income, and more. Consider reaching out to our team to learn more and to see if a Cash Balance plan would be beneficial to your company.
Cash Balance Plan Examples
Curious about how Cash Balance plans have helped other organizations? Explore the following case studies to see how implementing a Cash Balance plan has been beneficial to our clients:
How October Three Reduced Retirement Plan Volatility for a Private Medical Practice
Helping Small Business Owners Catch Up on Retirement Savings
Learn More About Implementing a Cash Balance Plan
We recommend consulting with a financial professional before determining whether a Cash Balance plan is right for your unique scenario. Feel free to explore our service page or schedule time directly with October Three Partner John Lowell if you’d like to learn more about Cash Balance or Hybrid plans.
