A cash balance plan may be worth a look for a business owner whose income is high and steady, whose 401(k) deferrals already reach the 2026 limit of $24,500, and whose sale or transition may be five to ten years out.3 A cash balance plan is one way some owners make much larger deductible contributions, and it brings fixed funding obligations and running costs: the IRS notes that defined benefit plans let employers contribute and deduct more than under other retirement plans, while also listing them as the “most administratively complex plan.”2
This article explains how the plan works, the 2026 limits that apply, how it compares with a 401(k), what it costs, the risks to weigh, who it may fit, and how it can interact with an exit timeline.
Quick Answer A cash balance plan is a type of defined benefit pension plan that records each participant’s benefit as a hypothetical account balance. The employer credits each account every year with a pay credit and an interest credit, funds the plan, and carries the investment risk.1 Because the allowed contribution rises with age, owners in their 50s and 60s may be able to contribute substantially more than a 401(k) allows; Milliman’s 2026 illustration shows a $336,000 maximum cash balance contribution at age 60.5 |
What Is a Cash Balance Plan?
The U.S. Department of Labor describes a cash balance pension plan as a defined benefit plan that states the promised benefit as an account balance, which makes it resemble a defined contribution plan.1 Unlike a 401(k) balance, the account is a bookkeeping figure the employer promises to pay and must fund. Further detail is available in the DOL fact sheet on cash balance pension plans.1
How a Cash Balance Plan Works
Each year a participant’s hypothetical account receives two credits. The pay credit is a set amount or a percentage of compensation; the DOL uses 5% of compensation as an example. The interest credit can be a fixed or variable rate, and it applies to the balance already credited.1
Participants do not pick their own investments. The employer manages the plan’s assets as a pool, and participation is generally not elective.1 An enrolled actuary determines the funding level and signs Schedule SB of the plan’s Form 5500, and an excise tax applies if the minimum contribution requirement is not met.2 Under IRS guidance, businesses can generally contribute, and therefore deduct, more each year than in defined contribution plans.2
Cash balance benefits are typically insured by the Pension Benefit Guaranty Corporation (PBGC).1 Federal law exempts some plans from PBGC coverage, including plans maintained exclusively for substantial owners and plans of a professional service employer, such as a practice owned by professional individuals whose principal business is professional services, that have not at any time had more than 25 active participants.4
How Is a Cash Balance Plan Paid Out?
When a participant leaves or retires, the plan generally can pay the benefit as an annuity based on the account balance or, with spousal consent where required, as a lump sum. The DOL notes that a lump sum can generally be rolled over to an IRA or another employer’s plan.1 Cash balance benefits must be fully vested after three years of service.1
Cash Balance Plan Contribution Limits in 2026
Cash balance plan contribution limits are not a single dollar cap. The tax code limits the annual benefit a defined benefit plan can provide, and the actuary works backward from that benefit to the contribution needed to fund it. For 2026, IRS Notice 2025-67 sets the annual benefit limit under section 415(b)(1)(A) at $290,000, up from $280,000, and the compensation that can be counted under section 401(a)(17) at $360,000, up from $350,000.3
With fewer years left to fund the same benefit, older participants can receive larger contributions. The table below shows the cash balance plan contribution limits 2026 illustration published by the actuarial firm Milliman. For comparison, the 2026 401(k) elective deferral limit is $24,500, with an $8,000 catch-up at age 50 and older and $11,250 for ages 60 through 63.3
Age | 401(k) (Milliman) | Cash balance plan | Combined total |
45 | $72,000 | $159,000 | $231,000 |
50 | $80,000 | $204,000 | $284,000 |
55 | $80,000 | $262,000 | $342,000 |
60 | $83,250 | $336,000 | $419,250 |
65 | $80,000 | $349,000 | $429,000 |
Source: Milliman, “Cash Balance Plan 101” (© 2026), 2026 maximum contributions by age.5 Figures are illustrative maximums that Milliman states are “not specific to any plan”; actual limits depend on plan design, compensation, the plan’s interest crediting rate, past benefits, and the actuary’s calculation. Milliman’s 401(k) column reflects combined 401(k) limits and assumes deferrals are made on a non-Roth basis.
Cash Balance Plan vs. 401(k)
The core cash balance plan vs 401k difference is who makes the promise: the employer promises and funds a cash balance benefit, while a 401(k) benefit is whatever the account grows to.1, 2 The 2026 limit on total annual additions to a defined contribution plan, including employee deferrals and employer contributions, is $72,000 under section 415(c).3
Feature | Cash balance plan | 401(k) |
Plan type | Defined benefit1 | Defined contribution2 |
Who funds it | Employer1 | Employee deferrals, plus any employer contributions |
Investment risk | Employer1 | Participant |
2026 limit | Benefit-based: $290,000 annual benefit; contribution set by actuary3 | $72,000 total additions; $24,500 deferral, plus catch-ups3 |
Skipping a year | Minimum funding required; excise tax if missed2 | Deferrals are elective; employer amounts depend on plan design1 |
Investment choice | Employer manages pooled assets1 | Participant selects from plan menu1 |
Annuity option | Lifetime annuity must be offered1 | Not required1 |
Administrative cost | Higher; actuary and Schedule SB required2 | Lower; no actuarial certification |
Sources: DOL1; IRS2; IRS Notice 2025-673; Milliman.5 Summary only; individual plan documents control.
The two plans are frequently used together. A common design pairs a safe harbor 401(k) with profit sharing and a cash balance plan; Milliman’s age table shows the two side by side.5 This design generally requires a meaningful contribution for eligible employees so the combined plans pass nondiscrimination testing; Milliman describes candidate employers as those able to contribute 5% to 10% of compensation for employees.5 Owners comparing other approaches may also review our article on retirement savings strategies for high earners.
What a Cash Balance Plan Costs
For a cash balance plan for small business owners, cost has two parts: running the plan and funding it. The IRS states that defined benefit plans “are often more complex and, thus, more costly to establish and maintain than other types of plans.”2 Recurring expenses can include plan document and setup fees, annual actuarial certification, third-party administrator (TPA) fees, and the annual Form 5500 filing with Schedule SB.2
Plans covered by the PBGC also pay premiums. Milliman reports 2026 PBGC premiums of $111 per participant (flat rate) plus $52 per $1,000 of unfunded vested benefits (variable rate).5 The largest cost for many employers may be the required contributions for eligible staff. Fee quotes vary by plan size and design.
Disadvantages and Risks to Weigh
A cash balance plan carries obligations that a 401(k) does not:
Required funding. Minimum contributions are due even in a weak year, and an excise tax applies if the requirement is not satisfied.2 Milliman notes plans may need cash contributions in less ideal years.5
Permanence. Treasury regulations state that a plan implies a permanent program, and abandoning it within a few years for reasons other than business necessity can be evidence it was not bona fide.6 Milliman cites a period of no fewer than five years as a common planning assumption.5
Investment mismatch. The employer bears the investment risk.1 If plan assets earn less than the interest credit rate, the employer may need to contribute more; if they earn more, the plan can become overfunded.
Staff costs and complexity. Employee contributions and testing add expense, and the IRS lists “most administratively complex plan” among defined benefit plan disadvantages.2
Is a cash balance plan a good idea? It depends. It depends on income stability, age, employee count and time to exit. Stable income, several years before a sale and few employees can make the obligations easier to carry; uncertain cash flow or a short horizon can make them harder.
Who a Cash Balance Plan May Fit
A cash balance plan may fit:
Owners with stable, high income they expect to continue for several years.
Owners in their late 40s and older, since allowed contributions rise with age.5
Firms with few employees, or with a large age and pay gap between the owner and staff.
Professional practices, some of which may qualify for the PBGC professional service exemption.4
It may not fit businesses with volatile cash flow, or owners expecting to sell within a year or two, given the funding requirements and the expectation that the plan be permanent.2, 6
Cash Balance Plans and Your Exit Timeline
The years before a sale are when some owners want large deductions. Because a plan is expected to be permanent, the plan’s lifespan and the target sale date are worth discussing with the actuary at the design stage.6
What happens when a cash balance plan is terminated? Accrued benefits of all affected employees become 100% vested, and assets must be distributed as soon as administratively feasible, which the IRS generally reads as within one year after termination.7 Defined benefit plans covered by Title IV of ERISA also follow PBGC termination rules.7 Owners can plan ahead to fund any contribution still required for the final plan year. Participants can generally roll lump sums into IRAs.1
Timing matters. Some owners terminate the plan before or at closing so the buyer does not inherit it; a buyer may also choose to continue or merge the plan. For the broader picture, see why owners may want to start exit planning earlier, what happens to your wealth the day you sell, and our business succession planning guide.
Frequently Asked Questions
According to the IRS, a qualified plan may, but is not required to, provide for loans, and loans are capped at the lesser of $50,000 or the greater of $10,000 or 50% of the vested balance.8 Whether a cash balance plan permits loans depends on its plan document; the plan's actuary or TPA can confirm whether that feature is available.
Yes. A plan covering only the owner, or the owner and spouse, is a one-participant plan for IRS filing purposes and files Form 5500-EZ.9 Plans maintained exclusively for substantial owners are exempt from PBGC coverage under federal law.4 The same funding, actuarial and permanence rules apply to a one-person plan.2, 6
Online cash balance plan calculator tools can give a rough range, but the contribution depends on age, compensation, plan design and interest credit rate.5 An actuary's illustration based on the owner's census data provides a more specific figure. Milliman's 2026 table above is one published illustration.5
Yes. The DOL states that cash balance benefits must be fully vested after three years of service.1 If the plan terminates, the accrued benefits of all affected employees become 100% vested regardless of service, according to the IRS.7
The DOL notes that cash balance benefits are typically insured by the PBGC.1 Exemptions in federal law include plans maintained only for substantial owners and plans of professional service employers that have not at any time had more than 25 active participants.4
Where This Fits Into a Broader Financial Plan
Moran Wealth Management is a fee-only, fiduciary adviser. We receive no commissions and have no product incentives tied to plan design. For owners considering a cash balance plan, we coordinate plan design with the owner’s CPA, actuary and third-party administrator, and we can manage the plan’s investments with the interest credit rate in view. We do not run the plan, prepare actuarial certifications or file Form 5500, and we do not provide legal or tax advice directly. Corey Grant, CFP®, ChFC®, who leads retirement plan design for our wealth management for business owners clients, works alongside the owner’s other advisors. Learn more about Corey Grant.
Each professional retains responsibility for their own advice and work, and results can vary based on individual circumstances.
To discuss whether a cash balance plan fits your situation, Schedule a Complimentary Consultation.
Call 239-920-4440, or email info@moranwm.com.
Sources
[1] Fact Sheet: Cash Balance Pension Plans, U.S. Department of Labor, Employee Benefits Security Administration.
[2] Defined benefit plan, Internal Revenue Service.
[3] Notice 2025-67: 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living, Internal Revenue Service.
[4] 29 U.S. Code § 1321 – Coverage, Legal Information Institute, Cornell Law School.
[5] Cash Balance Plan 101, Milliman, Inc..
[6] 26 CFR § 1.401-1 – Qualified pension, profit-sharing, and stock bonus plans, Legal Information Institute, Cornell Law School.
[7] Retirement plans FAQs regarding plan terminations, Internal Revenue Service.
[8] Retirement plans FAQs regarding loans, Internal Revenue Service.
[9] Form 5500 corner, Internal Revenue Service.
We do not provide tax or legal advice; please consult your CPA, attorney, or registered tax professional for individualized tax or legal advice.
This example is provided solely to illustrate a general concept and should not be construed as investment, legal, or tax advice, or as a recommendation of any strategy or product. Individual circumstances vary, and actual outcomes for any investor will differ. Please consult your advisor to discuss how these concepts may or may not apply to your specific situation.
This communication does contain content generated or assisted by artificial intelligence (AI). While reviewed for accuracy, AI-generated content may not fully reflect all nuances of your individual circumstances. Please consult your advisor directly for personalized guidance.