Once a business owner or partner has maxed out the 401(k) employee contribution ($23,500 in 2025) and the employer profit-sharing match (combined cap of $70,000), the contribution journey has historically stopped there. But for owners and partners with strong, stable income and a desire to save aggressively in their late 40s, 50s, and 60s, cash balance plans can layer on top and roughly quadruple that limit.
What a cash balance plan is
A cash balance plan is a defined benefit pension plan structured to look more like a defined contribution plan. Each participant has a hypothetical "account" that grows by an annual pay credit (set by the plan) plus an annual interest credit (also set by the plan, typically 4–5%). At retirement, the participant can take the account balance as a lump sum or convert it to an annuity.
Because the plan is technically a defined benefit pension, contribution limits are calculated based on the lifetime benefit it's funding — and those limits scale with age. A 60-year-old partner can often contribute $250,000–$340,000 per year on top of their 401(k).
Why the math has gotten harder to ignore
- SECURE 2.0 changes raised the contribution caps further for older participants (the "super catch-up" provisions starting at ages 60–63 are particularly attractive in cash balance design).
- State and local tax pressure. With the SALT deduction capped, high earners in high-tax states are looking for pre-tax shelters more than they did pre-2018.
- Stable interest rates. The interest credit rates used in cash balance plans have stayed in a reasonable range, keeping plan funding predictable.
Who they work for
Cash balance plans work best when:
- Owners have strong, predictable income — typically $400,000+ per partner or owner.
- Owners are typically older than the rank-and-file employees (so plan economics favor owners).
- The business can commit to required contributions for at least 3–5 years (these are pension plans, not 401(k) optional matches).
- Profit-sharing contributions to staff are acceptable — usually 5–7.5% of pay, structured to satisfy non-discrimination testing.
Common fits: medical, dental, and legal practices; engineering and architecture firms; financial services partnerships; closely-held S-corps and family businesses with stable cash flow.
A cash balance plan is a long-term commitment, not a one-year tax play. Once installed, it's expected to run for at least three to five years. The ROI is enormous when the fit is right — and painful when it isn't. The first conversation should be modeling the right contributions, not picking a plan vendor.
How they pair with the existing 401(k)
A cash balance plan rarely replaces a 401(k); it sits on top. The combination typically looks like:
- 401(k): Employees defer up to $23,500 (or more with catch-ups).
- Profit sharing inside the 401(k): Employer contribution of 5–7.5% of pay to staff; up to the IRS limit for owners.
- Cash balance overlay: Additional contribution targeted at owners and senior partners, calculated by an actuary to satisfy non-discrimination testing.
Setting one up requires an actuary and a TPA — both of which we coordinate. The first year is most of the work; subsequent years are routine. For the right business, the tax savings often exceed the plan's all-in cost within the first 90 days.
