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Cash Balance plans are a type of defined benefit retirement plan that offers higher contribution limits than standard 401(k)/Profit-sharing. However, unlike traditional pensions, Cash Balance designs offer a hybrid approach, combining the stability of defined benefit plans with the transparency of defined contribution plans.
In this article, we explore how a cash balance plan works, who these plans are often best for, and other key questions to help clarify why these plans have increased in popularity over recent years.
Cash Balance plans are a type of Defined Benefit retirement plan. In general, Defined Benefit plans are retirement plans where employers shoulder investment risk and promise a specific benefit in retirement, typically a monthly payment for life based on factors like salary and years of service. A traditional pension plan is one example of a Defined Benefit retirement plan.
Unlike a 401(k) plan, which places account growth on the participant, Cash Balance plan benefits increase each year through imputed employer contributions and earnings. These imputed contributions and earnings are frequently referred to as "credit."
Credit generally comes in two types: pay credit and interest credit.
Pay credit: Is 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. Fixed crediting rate often does not 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.
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.
A Market-Based Cash Balance plan is another term for a cash balance plan that uses a variable-rate interest credit, reducing risk and volatility for plan sponsors. As shown in our 2026 Cash Balance Report, 53% of new Cash Balance plans today are Market-Based, making them the most popular design by far.
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.
Tax-deferred status: As qualified retirement plans, cash balance plans are tax-differed. 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. To see what your contribution could look like try our contribution calculator.
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.
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 notable limitation of cash balance plans is the inability for participants to change the amount of money routed into the cash balance plan each year. However, many plan sponsors will amend the plan every three to four years, allowing participants to modify their benefit accrual.
Accessibility of funds: Unlike 401(k) plans, which may offer loans or hardship withdrawals, Cash Balance plans are designed to be permanent, with no option for elective contributions. 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.
Added costs: Cash Balance plans can lead to higher costs. For instance, an actuary must review and certify plans each year to ensure compliance and proper funding. 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.
| Age | 401(k) Elective Deferral | Profit-Sharing | Max Cash Balance Contributions | Combined Plan Total |
|---|---|---|---|---|
| 35 | $24,500 | $47,500 | $97,000 | $169,000 |
| 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 | $32,750 | $47,500 | $336,000 | $419,250 |
| 65 | $32,500 | $47,500 | $349,000 | $429,000 |
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
In general, Cash Balance plans offer both higher contribution limits and potential tax savings to participants when compared to a 401(k). However, as with any design, there are pros and cons. See our article on Cash Balance vs. 401(k) plans for a breakdown of the advantages, disadvantages, and differences between each plan.
At October Three, we specialize in creating strategic cash balance plans designed specifically to maximize the benefits for employers and employees. Our team is dedicated to helping businesses navigate the complexities of retirement planning and creating unique solutions that work best for their circumstances. Interested in seeing how a cash balance plan might work for you? Try out our contribution calculator to see what you could contribute on an annual basis or request a personalized illustration today.