What Is A Cash Balance Plan?

Cash Balance plans provide significant savings opportunities for partners and owners to maximize retirement savings well beyond the 401(k)/Profit sharing limits.

A cash balance plan (CBP) is a qualified retirement plan expressed as an account balance, similar to a 401(k). It is a defined benefit (DB) plan that has been structured specifically to meet the increased contribution and equity objectives of professional service firms. Unlike a traditional DB plan, a cash balance plan has the look and feel of the firm’s existing DC plan where each participant has an “account” that grows each year with contribution credits and interest credits. In addition, there is “equity” among participants in that the cost of each individual’s benefit can be readily identified for cost allocation purposes. Because a cash balance plan is a defined benefit plan, contributions can be much larger. There are also some additional rules. Such plans typically supplement a firm’s existing defined contribution (DC) program (401(k)/Profit Sharing) and provide all of the following advantages:

  • Income deferral opportunities far beyond DC limits

  • Flexibility around who is covered and what the contribution level is

  • Tax-deductible contributions which protect assets from creditors. 

  • Lump sum payouts available for rollover or Roth Conversion

  • Transparency regarding the cost of each participant’s benefit

Generally speaking, a cash balance plan promises to pay a participant a lump sum balance, which is comprised of contribution credits and interest. Contribution credits are set by the employer in advance and written in the plan’s document. Therefore, they are not discretionary like you might see an employer make inside of a 401(k) plan. Interest crediting is also defined by the plan. However, it is often tied to the underlying investment returns to minimize risk to the plan sponsor and create a promise that behaves similarly to the way a 401(k) plan operates. Note: if actual returns are used, a participant must receive at least the promised contribution credits, or, put another way, a guaranteed zero percent return over the lifetime of participation in the plan. For a full analysis of the risk present in this “floor” guarantee, click here.

How much more can be tax-deferred under a cash balance plan?

Total deductible contributions can be two to four times more than contributions to the firm’s existing qualified DC plan (for 2023, the limit on total contributions to a DC plan is $66,000 if under age 50, and $73,500 if 50 or older). Cash Balance Plan contributions are in addition to the amounts contributed to the DC plan and typically vary based on a participant’s age, compensation level and/or employment group.

As displayed in this table, the maximum Cash Balance Plan deferral opportunity increases with age. Coupled with the maximum DC amounts from elective deferrals and profit sharing, the table shows the maximum deductible contribution opportunity available across all qualified retirement plans. While it may be appropriate for some key employees to have contributions at the highest levels, for others it may not. The flexibility built into the overall program is designed to meet the individual needs of each key employee. To see what your contribution could look like try our contribution calculator.

Is there an added cost?

The amount that can be contributed on behalf of business owners or partners is impacted by the level of benefits provided for the staff. In general, contribution levels need to be in the range of 5.0% to 7.5% of pay. Because many companies already provide benefits at this level, there is typically no added cost for establishing a cash balance plan. If the staff contribution is not within the stated range, then adoption of a cash balance plan may require additional DC contributions.

Interested in seeing if a cash balance plan might be right for you? Try out our contribution calculator to see what you could contribute on an annual basis or request a personalized illustration.