What Is a Cash Balance Retirement Plan?

A Strategic Tool for High‑Earning Professionals and Business Owners

For business owners, high‑net‑worth individuals, and professionals facing the limits of traditional retirement savings, understanding what is a cash balance retirement plan is essential. A cash balance plan offers a sophisticated way to accelerate retirement savings, reduce taxable income, and implement a retirement plan that provides a promised benefit rather than only what is contributed. At Towerpoint Wealth we believe the right retirement plan aligns with your broader financial picture, your business objectives, your tax strategy, and your long‑term lifestyle goals. This article explains cash balance plans in depth, so you can evaluate whether one is appropriate for your unique situation.

What Is a Cash Balance Retirement Plan?

A cash balance retirement plan is essentially a hybrid between a defined benefit plan and a defined contribution plan. Although it is legally classified as a defined benefit plan, it operates in many ways like a defined contribution plan by presenting to participants a hypothetical account balance, similar to what you might find in 401 k plans. Participants see a “balance” that grows by employer credits of two kinds: pay credit and interest credit.

In a typical cash balance plan design, each year the employer makes employer contributions to the plan, which are allocated to each participant’s hypothetical account. Then an interest credit is applied to the prior year’s account balance at a fixed or variable rate.

While it may look like other retirement plans where you have an account balance, the employer bears the investment risk, and the employer must ensure the defined benefit promised under the plan is funded. This differs from defined contribution plans where the employee bears the investment risk and manages the plan’s investments.

Because of this structure, cash balance plans combine the feature of guaranteed retirement benefits (as in traditional defined benefit plans) with the transparency, easier communication, and portability of other retirement plans.

How Do Cash Balance Plans Work?

Pay Credits and Interest Credits

Most cash balance plans use two forms of crediting:

• Pay credit: A set dollar amount or percentage of compensation that the employer credits each year to the plan participant’s account. This pay credit contributes to the total account balance that grows over time.
• Interest credit: A rate applied each year to the participant’s hypothetical account balance—often a fixed rate (for example 4 %) or a variable rate tied to an index (for example a Treasury index). These credits cause the hypothetical account balance to grow year‑over‑year, even though participants do not control investment choices and bear no investment risk.

Employer’s Role and Investment Risk

Because the plan is legally a defined benefit plan, the employer (plan sponsor) is responsible for funding the promised benefit, performing annual actuarial valuations, and satisfying the funding and regulatory obligations. Investment risk is borne by the employer, not the participant, since the participant receives the interest credit regardless of actual investment performance in the plan’s assets.

This structure contrasts with traditional pension plans where retirement benefits are typically paid as monthly payments, often calculated based on years of service and final salary. In cash balance plans, the accrued benefit is expressed as a total account balance, which can be converted into a lifetime annuity or a lump sum payout.

Importantly, cash balance pension plans are part of private sector pension plans and are generally protected by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC), which offers a federal guarantee that safeguards participants’ accrued benefits in case of plan sponsor insolvency.

Benefit Payments and Lump Sum Options

At retirement or termination of employment, the participant in a cash balance plan will often receive either a lump sum distribution equal to the account balance or an annuity based on the promised benefit, depending on the plan’s terms. For many plan participants, a lump sum payout rollover into an individual retirement account (IRA) or other qualified retirement plan is the common path, providing flexibility.

Who Is a Good Candidate for a Cash Balance Plan?

Professionals and Business Owners with High Compensation

If you are a business owner, partner, or professional earning high wages (for example $300,000 + per year) and you are already contributing the maximum to your other retirement plans, a cash balance plan can help you accelerate retirement savings significantly. Because contribution amounts in these plans are largely age‑based and compensation‑based, older professionals (age 50‑65) benefit most. The high contribution limits available in cash balance plans make them especially attractive for those seeking to maximize retirement savings beyond the annual limits of 401 k plans and other defined contribution plans.

Smaller Firms with Stable Earnings and Fewer Employees

Cash balance pension plans work especially well in businesses with consistent profits, fewer employees, and owners who want to maximize deductions and savings. Many small professional practices are adopting cash balance plans for exactly that reason.

Those Already Maximizing Their 401(k) or Other Retirement Plans

If you are already contributing the maximum to your 401 k, profit‑sharing plan, or other retirement plan and you still seek additional savings opportunities and tax deferral, you should consider whether adding a cash balance plan to your retirement strategy makes sense.

Cash Balance Plan vs Defined Contribution Plan vs Traditional Defined Benefit Plans

Feature	Cash Balance Plans	Defined Contribution Plans	Traditional Defined Benefit Plans
Legal classification	Defined benefit plan	Defined contribution plan	Defined benefit plan
Account balance to participant	Yes (hypothetical account)	Yes (actual account)	No, typically an annuity benefit
Investment risk	Employer	Participant	Employer
Contribution potential	Very high, age & compensation based	Fixed limits	Benefit formula based
Ease of participant understanding	High (looks like account)	High	Lower (annuity format)
Portability	High (many plans allow lump sum)	Very high	Often lower
Typical best suited for	High‑income professionals & owners	Broad employee groups	Larger employers, legacy plans

This comparison shows how cash balance pension plans bridge the gap between defined contribution plans and traditional defined benefit plans, giving business owners the ability to accelerate retirement contributions and receive guaranteed retirement benefits.

2025 Contribution Limits and Regulatory Considerations

Under the latest regulatory guidance for retirement plans in 2025, the compensation limit under IRC 401(a)(17)/404(l) is $350,000. For defined contribution plans the limit under IRC 415(c)(1)(A) is $70,000. For defined benefit plans (including cash balance plans) the maximum annual benefit under IRC 415(b) is approximately $280,000 for 2025. Some plan designs indicate that the cumulative account balance in a cash balance plan might reach approximately $3.5 million for certain high‑income older participants.

There are important deadlines for establishing a cash balance plan with tax deductibility for a prior year. For example, a cash balance or profit sharing plan for tax year 2024 may still be adopted as late as September 15, 2025 with extension, assuming the business meets certain requirements.

Since cash balance pension plans are qualified retirement plans under ERISA and IRC rules, plan sponsors must follow nondiscrimination rules, perform actuarial valuations, adhere to funding requirements, and maintain plan documents. The plan must also comply with age discrimination regulations to ensure fair treatment of all employees.

Advantages and Considerations of Cash Balance Plans

Advantages

• Significant tax advantages: Employer contributions are tax‑deductible, accounts grow tax‑deferred, and the higher contribution potential allows owners to accelerate retirement savings.
• Acceleration of retirement savings: Because contribution limits are age and compensation based, older owners can save much more than they could with other retirement plans.
• Predictability and clarity for participants: Hypothetical account balances provide an easier‑to‑understand format than many traditional pension benefit formulas.
• Employer bears investment risk: Participants are insulated from market loss; they receive the interest credit regardless of asset performance.
• Federal insurance provided by the Pension Benefit Guaranty Corporation offers security for accrued benefits, a key protection not available in all retirement plans.

Considerations

• Annual funding requirement: Because these are defined benefit plans, employer contributions are required each year whether or not business profits are strong.
• Complexity and cost: Setup costs, ongoing actuarial services, plan administration and compliance monitoring are greater than many defined contribution only plans.
• Employee inclusion and nondiscrimination: The plan must satisfy regulations regarding employee coverage and benefit accrual for non‑owners, which may require meaningful contributions for employees. This includes ensuring that employee contributions and benefits are fairly allocated.
• Commitment horizon: Because the plan may require multiyear commitments, businesses with volatile income or short‑term horizons may find the plan less advantageous.

How to Combine a Cash Balance Plan with a 401(k)

In many cases business owners utilize a layered retirement plan strategy: continue making maximum contributions to a 401 k or profit‑sharing plan and add a cash balance plan to dramatically increase overall retirement savings. Suppose you contribute the maximum to a defined contribution plan ($70,000 in 2025) and then add a cash balance plan that allows you to contribute perhaps $200,000 or more (depending on age and compensation). The combined strategy enables very high contribution levels, meaningful tax‑deferred accumulation, and a powerful retirement savings vehicle for owners. With careful design you can align the cash balance plan with your overall retirement planning goals, liquidity needs, business succession plan, and exit strategy.

Real‑World Example of Implementation

Consider a professional services firm whose two owner‑partners each earn $600,000 per year. They already maximize their 401(k) contributions and profit‑sharing allocations. The firm establishes a cash balance pension plan designed to credit a pay credit of say 10% of income for each partner and an interest credit of 5% on account balances annually. After actuarial calculation the annual contribution for each partner might be $250,000.

The employees are included in the plan with smaller pay credits, satisfying nondiscrimination rules. Over the course of five years the partners build a substantial hypothetical account balance, lock in tax deductions for the business, and significantly reduce their taxable income. Upon retirement each partner may elect a lump sum distribution and roll it into an individual retirement account, preserving tax‑deferred growth. This example underscores how cash balance pension plans can be tailored to the needs of business‑owner professionals who seek to accelerate retirement savings while managing taxable income and aligning with long‑term goals.

Is a Cash Balance Plan Right for You?

Here are key questions to evaluate:

• Do you earn $300,000+ annually and want to accelerate retirement savings beyond what a 401 k allows?
• Are you age 45‑65 and seeking a catch‑up strategy that leverages age‑based contributions?
• Does your business have stable earnings and cash flow such that you can commit to annual employer contributions?
• Do you already maximize contributions in other retirement plans and want a complementary solution?
• Are you comfortable with the administrative obligations and the employee inclusion requirements that come with a defined benefit plan?

If you answered yes to most of these, then establishing a cash balance pension plan may offer significant upside. At Towerpoint Wealth we evaluate your business structure, retirement objectives, tax situation, liquidity needs and exit plan to determine whether a cash balance plan is appropriate and how best to structure it.

Designing and Implementing the Right Plan

Implementation of a cash balance plan involves:

• Retirement modeling: projecting contributions, tax reduction, projected account balances, and retirement age outcomes
• Plan design: establishing pay credits, interest credit rates, coverage rules, lump sum vs annuity options, and eligibility
• Actuarial and third‑party administrator coordination: required for compliance, valuations, and funding
• Investment and trustee oversight: while participants don’t direct investments, the employer must oversee plan assets and investment policy
• Ongoing monitoring: managing funding levels, regulatory compliance, nondiscrimination testing, and business alignment

We work as your fiduciary partner to ensure the plan fits your overall financial plan and business goals, and we coordinate with your CPA, plan administrator, and actuary to execute efficiently.

Frequently Asked Questions (FAQs)

How much can I contribute to a cash balance plan in 2025?

Contribution capacity depends on your age, compensation, years to retirement, and plan design. While there is no single “$” annual cap like a 401(k), the maximum defined benefit under IRC 415(b) is about $280,000 for 2025, which in practice can translate into account balances reaching roughly $3.5 million for participants.

Can I have both a 401(k) and a cash balance plan?

Yes. Many business owners combine a 401(k) (defined contribution plan) with a cash balance plan to layer retirement savings strategies and take advantage of both structures.

Are cash balance plans portable if I leave my company?

In many cash balance pension plan designs, participants are eligible for a lump sum distribution of their hypothetical account balance upon termination of employment, which can often be rolled into an individual retirement account or other qualified retirement plan.

How are cash balance plans taxed?

Employer contributions are tax-deductible to the business, participant account growth is tax-deferred, and distributions are taxed as ordinary income unless rolled over. Participants pay taxes on distributions when they withdraw funds, but tax deferral during accumulation helps reduce current taxable income.

What happens if I shut down my business or retire early?

Plans can be frozen or terminated for legitimate business reasons, though proper process and compliance are required. Early termination decisions should factor in funding obligations, participant rights, and regulatory rules.

Conclusion

Understanding what is a cash balance retirement plan opens the door to a retirement strategy that offers significant benefits for business owners, professionals and high‑earning individuals. A cash balance plan blends the best of defined benefit and defined contribution plans by offering high contribution potential, tax advantages, and clarity for participants. However it also requires thoughtful business and financial planning, commitment, and the right professional support.

At Towerpoint Wealth we bring integrity, commitment, gratitude and compassion to our client relationships. We serve as your fiduciary advisor, helping you determine whether a cash balance plan fits your broader financial picture, design the plan properly, and execute it in alignment with your goals.

If you are ready to explore whether this advanced retirement plan strategy is right for you, let’s start a conversation.