Cash balance plans, for business owners

How it works

Legally it's a defined benefit plan — a pension. But instead of promising a monthly payment, it states each participant's benefit as an account balance. Each year the account is credited with a pay credit, such as a percentage of salary or a flat amount, and an interest credit, either a fixed rate or one tied to an index.

The accounts are hypothetical: they're a promise, not money set aside in each person's name. The business funds the plan as a whole and carries the investment risk — if the plan's investments fall short of the promised interest credits, the business makes up the difference.

Why it can take so much more

A 401(k) caps what goes in each year: $72,000 in 2026, plus catch-up. A defined benefit plan caps what comes out — the annual benefit at retirement, $290,000 in 2026. The closer an owner is to retirement, the less time there is to fund that benefit, so the allowed contribution grows with age. For an owner in their 50s or 60s it can be several times the 401(k) limit, and it's deductible to the business.

Many owners pair one with a 401(k), which adds the 401(k)'s deferral and profit-sharing on top — subject to combined limits a plan's actuary works out.

What it takes

• An actuary, every year. An enrolled actuary calculates the required contribution and signs the plan's Schedule SB, filed with its Form 5500.
• Required contributions. Once it's running, the business has to fund it each year — a cash balance plan isn't the place for money you might want back next year.
• Employees included. Eligible employees have to be covered, and the plan has to pass tests showing it doesn't favor the owners too heavily.
• Higher costs than a 401(k): the plan document, the actuary, and annual administration.
• Federal insurance. Benefits are usually insured by the Pension Benefit Guaranty Corporation, which charges premiums; some small plans, such as those covering only owners, are exempt.

Who it fits

• Owners with high income that's steady from year to year
• Owners in their late 40s or older, with a few years left to fund it
• Businesses with no employees, or a few whose cost of coverage is modest
• Owners already putting the most into a 401(k), who want to shelter more

When it doesn't fit

• Income swings from year to year — required contributions don't.
• Many employees, which can make coverage expensive.
• You haven't maxed out a 401(k) or SEP yet — start there. See your 401(k) limit.

Whether a cash balance plan fits your business, and what it would let you contribute, takes an actuary's illustration — and a conversation with your CPA or financial advisor.