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Though they can be effective, traditional 401(k) plans have significantly lower contribution caps compared to alternative plans, especially for S Corp owners and other high earners.
Cash Balance plans, on the other hand, offer a similar approach to a 401(k) with far higher contribution limits and the benefits of a defined benefit plan.
In this article, we explore why Cash Balance plans can be an effective retirement strategy for S Corp owners, key rules and considerations, and the next step to determine whether a Cash Balance plan is right for your company.
Cash Balance plans are defined benefit plans. But, unlike a traditional pension, a Cash Balance plan provides a participant experience that resembles that of a 401(k) plan.
The employer shoulders the investment risk in Cash Balance plans, ensuring the promised account balance regardless of market fluctuations. 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.
Cash Balance plans grow each year through two types of credit:
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.
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. Learn more about the update here.
As a Defined Benefit plan, Cash Balance plan contributions are generally protected from creditors under ERISA. However, owner-only plans often have fewer protections when compared to plans with employees.
Beyond the increased contribution potential, Cash Balance plans can also provide additional tax savings for S Corp owners. This is because Cash Balance plan contributions are deducted from the corporation's gross income, reducing the profit reported on your Schedule K-1 and the effective amount owed on self-employment tax.
Cash Balance plans and 401(k) plans are not mutually exclusive. Both plans can be combined to offer significant advantages while offsetting some of the disadvantages, combining the flexibility of a 401(k) with the reliability and increased savings of a Cash Balance.
For example, where participants can’t adjust how their retirement assets are invested in a Cash Balance plan, they can make discretionary changes to a 401(k). Furthermore, Cash Balance plans deliver greater security in retirement, making up for the inherent risks of a 401(k) plan.
Naturally, managing both plan types comes with additional costs, so whether the advantages are worth it will depend on your goals. Visit our Cash Balance and Hybrid plan service page to learn more about these unique plan structures.
It should be noted that Cash Balance contribution limits increase each year, allowing for significantly higher contributions with age. Increased contribution limits further improve the tax advantages noted above.
| 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 |
As a defined benefit plan, Cash Balance plans are subject to IRS §415 limits on the maximum lifetime retirement benefit. When converted to a lump sum, this benefit limit is often roughly equivalent to a few million dollars (e.g., around $3.5M–$3.8M depending on age and interest rates as of 2026). This is not a cumulative contribution cap, but rather a limit on the maximum allowable pension benefit that can be funded over time.
Actuaries design cash balance plan contributions using several factors, including W-2 compensation, age, tenure, and the target retirement benefit. Some S Corp owners intentionally keep W-2 earnings low to reduce payroll taxes. However, doing so may reduce the compensation base used in actuarial calculations, which can limit maximum tax-deductible contributions and the plan benefit.
Cash balance plans can experience funding volatility because required employer contributions are determined annually by actuarial calculations that reflect investment returns, interest rates, and participant demographics. Traditional fixed-rate designs can create greater mismatch risk between assets and liabilities, while Market-Based Cash Balance plans can help reduce this volatility by aligning crediting rates more closely with actual investment performance. However, plan funding obligations are ultimately determined by IRS minimum funding rules and must be satisfied by the plan sponsor over time, subject to actuarial valuations throughout the life of the plan.
Whether a Cash Balance plan is the best route for your corporation will depend on your unique scenario and goals. However, Cash Balance plans are generally beneficial to corporations with:
Consistently high profits
A desire for increased retirement savings
Owners above age 35 who can benefit from higher contribution caps
Fewer employees to manage costs associated with nondiscrimination requirements.
Establishing a Cash Balance plan is an in-depth process that requires the support of a registered actuary. If you’re interested in learning more about establishing a Cash Balance plan for your S Corp, our team would be happy to help get you started. Click here to contact our team and learn more.