Cash Balance Plans for Small Professional Firms
For a profitable small firm with a few high-earning owners, a cash balance plan layered on top of a 401(k) can dramatically increase tax-deferred contributions.
A 401(k) plan, by itself, caps total annual contributions for an individual at the §415 limit. For owners of a profitable small firm (physicians, attorneys, dentists, engineering principals) that ceiling is often hit long before the owner has saved what they want for retirement.
Where cash balance fits in
A cash balance plan is a defined benefit plan structured like a notional account. Each participant has a “hypothetical account” that grows by an annual pay credit and an interest credit. Because it is a DB plan, the contribution limits are based on the benefit at retirement, not on a flat dollar figure, which means an older, higher-paid owner can shelter far more than the §415(c) limit would allow on a defined contribution plan alone.
A simplified example
A 55-year-old principal earning well above the compensation limit might be able to contribute:
- 401(k) deferral: $24,500 (with catch-up)
- Profit sharing: roughly $46,000
- Cash balance pay credit: $200,000+
That is a tax-deferred contribution that simply is not reachable with a 401(k) alone.
The trade-offs
Cash balance plans require:
- A consistent ability to fund the plan year over year
- An actuarial valuation
- Coordinated nondiscrimination testing across both plans
They are powerful, but they are also a commitment. The right design depends on the demographics of the firm and the principals’ time horizon.