Can a Cash Balance Plan Let Business Owners Contribute More to Retirement Than a 401(k) Allows?

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For business owners who have already maximized what they can put into a 401(k), retirement saving can appear to hit a ceiling fairly quickly. A Cash Balance Plan can potentially raise that ceiling substantially, particularly for older, highly compensated owners with consistent business income. The tradeoff is a plan that requires more funding discipline, actuarial oversight and administrative complexity.

What Is a Cash Balance Plan and How Does It Differ From a 401(k)?

A Cash Balance Plan is a type of Defined Benefit Plan, although participants see a stated account balance that can make it look somewhat like a 401(k). Each year, the plan generally credits a participant with a pay credit and an interest credit.

The distinction matters. In a 401(k), contributions go into an individual account and the participant generally bears the investment risk. With a Cash Balance Plan, the employer is responsible for funding the promised benefit, regardless of how the underlying investments perform. The Department of Labor likewise states that employers bear the investment risk for these plans.

How Much More Can a Business Owner Contribute Through a Cash Balance Plan?

The difference can be significant. For 2026, the 401k contribution limits include a $24,500 employee elective deferral and an overall defined contribution limit of $72,000, excluding catch-up contributions. Participants age 50 or older may generally contribute another $8,000, while those ages 60 through 63 may qualify for an $11,250 catch-up.

Cash Balance Plans work differently. There is no single annual contribution limit comparable to the $24,500 401(k) deferral limit. Funding is actuarially determined based on factors including age, compensation and the promised benefit. For 2026, the IRS limits annual defined benefits to generally the lesser of 100% of the participant’s highest three-year average compensation or $290,000.

How a Cash Balance Plan and a 401(k) Work Together

Business owners do not necessarily have to choose one plan or the other. A company can maintain a 401(k) while also sponsoring a Cash Balance Plan, allowing qualifying owners and employees to accumulate benefits under both structures.

That combination is often where the planning opportunity becomes more substantial. The 401(k) provides defined contribution flexibility, while the cash balance component can permit substantially greater employer-funded retirement accumulation for certain participants. The plans must still satisfy applicable qualification, nondiscrimination, funding and other requirements, so the design needs to consider the entire employee population, not simply the owners.

For some closely held businesses, the retirement strategy may also fit into broader Estate Planning discussions involving long-term wealth accumulation and eventual transfers.

What It Costs to Set Up and Maintain a Cash Balance Plan

A Cash Balance Plan generally costs more to establish and administer than a stand-alone small business retirement plan such as a 401(k). In addition to plan design and ongoing compliance, employers typically need actuarial services to calculate required contributions and complete the annual review and certification. Investment management, recordkeeping and other administrative services can also add to the overall cost.

There is no government-set standard fee for establishing or maintaining a Cash Balance Plan. Costs depend on plan size, design and service providers. That makes the relevant question less about a universal price and more about whether the additional deductible retirement funding available to the business justifies the added administrative expense and funding obligations.

Those decisions should also be coordinated with the owner’s broader tax position, including issues such as Basis of Property when other assets or transactions are part of the overall planning picture.

Which Business Owners Benefit Most From a Cash Balance Plan?

Cash Balance Plans can be particularly attractive to business owners with high, predictable income who want to save substantially more for retirement than a 401(k) alone may allow. Professional practices, including accounting, legal and medical practices, are common examples. High-earning consultants and other closely held businesses may also consider these plans when cash flow is consistent.

Age can also affect the amount that can be contributed. Because a cash balance plan is a defined benefit plan, actuarial calculations consider factors such as a participant’s age, compensation, retirement age and plan design. An older owner who is closer to retirement may therefore have a higher allowable contribution than a younger participant, although the actual amount depends on the plan’s actuarial calculations.

Employee demographics matter as well. A plan that appears attractive when viewed only from the owner’s perspective may have different costs once eligible employees, required benefits and nondiscrimination requirements are considered. IRS guidance specifically addresses cash balance plan designs involving highly compensated employees and the need to provide meaningful benefits to other employees.

For the right business, combining a 401(k) with a Cash Balance Plan can create considerably more retirement-saving capacity. The determining factor is not simply whether an owner wants to contribute more, but whether the company’s cash flow, workforce and long-term plans can support the commitment.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Employee Benefit Plan Audit Team, or call us at 770.396.2200.

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