A 401(k) is the first place most owners put money away, and for a profitable owner it fills up fast. In 2026 the most that can go into a 401(k) and profit-sharing plan for one person is $72,000, plus catch-up contributions after 50. For an owner earning seven figures, that barely moves the tax bill.
A cash balance plan works on a different rule. It is a pension, so the limit is set by the retirement benefit it can promise, not by a flat dollar cap. For an owner in their 50s or 60s, that can mean a deduction several times the size of the 401(k), every year the plan runs. It is one of the few large, legal tax deferrals left for a profitable private company, and most owners have never had it explained.
How it works
Legally, a cash balance plan is a defined benefit plan. In practice, each participant sees an account balance that grows two ways each year:
- A pay credit: a set percentage of pay or a flat dollar amount, written into the plan.
- An interest credit: a fixed rate or one tied to an index. The tax rules don’t allow it to exceed a market rate of return.
The promised balance doesn’t move with the markets. If the plan’s investments earn more or less than the interest credit, future contributions adjust to close the gap. At retirement or when the plan ends, each balance can be paid as an annuity or a lump sum, and a lump sum can roll directly into an IRA.
It sits next to the 401(k), not instead of it. Most owners run both: the 401(k) and profit-sharing plan take their $72,000, and the cash balance plan adds the layer above it.
How much you can put away
A 401(k) has a fixed ceiling. A cash balance plan’s ceiling is whatever an actuary calculates it takes to fund a benefit up to the federal limit, which in 2026 is a pension of $290,000 a year at 65, or 100% of your average pay over your best three years if that’s less. Pay counted for the formula is capped at $360,000. So the deduction depends on three things: your age, your pay and how many years are left until retirement age. The older you are, the more the plan has to put away each year to get there.
| Owner’s age | Cash balance plan and 401(k) combined |
|---|---|
| 45 | About $231,000 |
| 55 | About $342,000 |
| 65 | About $429,000 |
These are one actuarial firm’s illustrations, not a promise for any particular plan. Your own figure comes from your plan’s actuary and changes every year.
What that’s worth in a fictional example. Dana, 56, owns a Rochester engineering firm. If a cash balance plan lets her deduct $250,000 more than her 401(k) allows, and her combined federal and state rate on that income is a hypothetical 45%, that’s about $112,500 of tax deferred that year. Deferred, not forgiven: the money is taxed when it comes out, ideally in years when her income is lower.
The combined-plan rule. When the same people are in both plans and the cash balance plan isn’t insured by the PBGC, the IRS caps the combined deduction. Employer contributions to the 401(k) side above 6% of pay count toward that cap, which is why owners in these plans often see their profit-sharing contribution set near 6%. PBGC-covered plans aren’t subject to the combined limit.
Who it fits
Steady, high profits
The plan is a yearly commitment. It works when the business reliably produces the cash, not after one great year.
An owner older than the team
Contributions are driven by age and pay, so an older owner with younger employees gets most of the benefit at a manageable cost for staff.
A few years of runway
A plan started the year of a sale has little time to work. The best fit is an exit several years out.
A 401(k) already maxed
It’s the next layer up, not a replacement. If the 401(k) isn’t full, start there.
The catch
Your employees have to benefit. The plan has to cover at least the lesser of 50 employees or 40% of the workforce, with a floor of two people, and it has to pass nondiscrimination testing. In practice that means meaningful contributions for staff, usually through a profit-sharing plan alongside it. That cost belongs in the math from day one.
The funding is required. It’s a pension, so the business has to make the minimum contribution the actuary calculates each year. There’s a range between the minimum and the maximum deductible amount, which gives some room, but a bad year doesn’t make the obligation disappear.
It costs real money to run. An actuary, a plan document, annual testing and a Form 5500 filing every year, and PBGC insurance premiums unless the plan is exempt. Plans covering only owners are exempt, and so are professional practices that have never had more than 25 active participants.
The IRS expects it to last. Qualified plans are meant to be permanent. Ending one within a few years needs a real business reason, such as a sale that wasn’t foreseeable when the plan began, or financial hardship. Practitioners’ informal benchmark is that a plan ten or more years old is rarely questioned; anything younger turns on the facts.
The investment risk is the company’s. If the plan’s investments fall short of the interest credit, the business makes up the difference. That’s why these plans are usually invested conservatively, close to the rate they promise.
When you sell the business
Buyers rarely want to take over a small company’s pension, so the plan is usually ended around the sale. A sale is a recognized business reason to terminate. Before it can end, the plan has to be fully funded; if it’s short, the owner may need to make a final contribution or, in a plan built mostly for owners, give up part of their own benefit to cover the gap.
Then each balance is paid out. A lump sum can move directly into an IRA with no tax and no withholding. Paid to you instead, the plan has to withhold 20%, and you have 60 days to get the full amount into an IRA. The termination itself takes months of filings, so it belongs on the deal calendar, not after it.
The pairing that works. Run the plan through the last high-income years before the exit, roll it into an IRA when the business sells, then use the lower-income years after the sale for Roth conversions. Each step only works if the next one was planned.
How Morrowgate handles this. We look at a cash balance plan as part of the exit timeline: the profit it would shelter, what covering your team would cost, and when it would end around a sale. An actuary and a plan administrator design and run the plan, and your CPA confirms the deductions. Morrowgate keeps it on the family balance sheet next to everything else, so the plan, the sale and the years after it are worked out together.
Questions owners ask
Can I have a cash balance plan and a 401(k)?
Yes, and most owners do. The 401(k) and profit-sharing plan take their limit first, and the cash balance plan adds the layer above it. If the cash balance plan isn’t PBGC-insured, employer contributions above 6% of pay on the 401(k) side count toward a combined deduction limit.
Does it work for an S corporation or LLC owner?
Yes. For an S corporation owner, the pay that counts is W-2 salary, not distributions, so a low salary means a smaller contribution. For a partnership or sole proprietor, it’s net earnings from self-employment. That interplay is worth working through with your CPA before the plan is designed.
What if the business has a bad year?
The actuary sets a range each year, from a required minimum to a maximum deductible amount, which gives some flexibility. The plan can’t simply be skipped. Talk to the actuary before cash gets tight, not after.
When does it have to be set up?
Since the SECURE Act of 2019, a new plan can generally be adopted as late as the business’s tax filing deadline, including extensions, for the year it should apply to. Starting earlier gives the actuary and your CPA room to design it well.
What happens to the money when I retire or sell?
Each participant’s balance can be paid as an annuity or a lump sum. A lump sum can roll directly into an IRA, where it keeps growing tax-deferred until you take it out.
Where this guidance stops
This article is general education on cash balance plans for business owners: how the rules and the options generally work. It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- EY Tax News: IRS releases 2026 qualified plan limits (Notice 2025-67)
- Mayer Brown: IRS annual limits for benefit plans, 2026
- IRS: Combined limits under IRC Section 404(a)(7)
- IRS: Issue snapshot, changing interest crediting rates in a cash balance plan
- Treas. Reg. 1.401(a)(26)-2: minimum participation
- PBGC: Professional service employer plans
- PlanSponsor: What is a strategic DB plan termination?
- IRS: Rollovers of retirement plan and IRA distributions
- Milliman: Cash Balance Plan 101