A cash balance plan is a defined benefit pension that looks like an account. Each participant has a hypothetical balance that grows with a set pay credit and an interest credit each year. Because the limits are based on the benefit at retirement rather than a yearly contribution cap, an older, high-income owner can often contribute much more than a 401(k) allows, and deduct it. It tends to fit practices with steady profit, a small staff and owners who want to catch up on retirement savings.
How is a cash balance plan different from a 401(k)?
A 401(k) is a defined contribution plan. The limit is on what goes in each year. For 2026, that is $24,500 of employee deferrals plus catch-ups, and $72,000 of total additions to one person's account before catch-ups (IRS, November 2025).
A cash balance plan is a defined benefit plan. The limit is on the benefit it can pay at retirement. For 2026, the maximum annual benefit is $290,000 (IRS, Notice 2025-67, November 2025). An actuary works backward from that benefit to the amount that can be contributed this year. The closer you are to retirement, the larger the allowed contribution, because there are fewer years to fund the same benefit.
A 401(k) caps what goes in. A cash balance plan caps what comes out, and that is why the numbers can be so much larger.
Who does a cash balance plan tend to fit?
- Owners in their late forties or older. Age drives the allowed contribution.
- Practices with steady, high profit. Contributions are an annual commitment, not a choice made in a good year.
- A small staff, or a staff younger than the owners. Employees must be covered, and their cost is part of the math.
- Owners already maxing out a 401(k). Cash balance plans are usually paired with a 401(k) and profit-sharing plan, not used instead of one.
What does it cost the practice?
Three things.
Employee contributions. The plan has to pass nondiscrimination testing, which usually means meaningful contributions for eligible staff, either in the cash balance plan or in the paired profit-sharing plan. Good design keeps this reasonable, but it is never zero.
Administration. A defined benefit plan needs an actuary each year, a third-party administrator, and an annual Form 5500 filing. Those fees are higher than for a 401(k) alone.
Funding risk. The plan promises a set interest credit. If the plan's investments earn less, the practice may have to contribute more later. If they earn far more, the excess can be hard to use. That is why cash balance plans are usually invested conservatively.
What commitments come with it?
A cash balance plan is meant to be permanent. The IRS expects a qualified pension to be maintained for a sustained period, and ending one after a year or two without a business reason can cause problems. Most designs assume several years of contributions. The required contribution each year falls within a range set by the actuary, so there is some flexibility, but skipping a year entirely is not one of the options.
Most defined benefit plans must also pay premiums to the Pension Benefit Guaranty Corporation (PBGC). Plans of professional service employers, such as physician and dental practices, that have never had more than 25 active participants are generally exempt from PBGC coverage.
How is it taxed?
Contributions are deductible to the practice within the limits. The money grows tax-deferred inside the plan. When an owner leaves or retires, the balance can usually be rolled into an IRA and drawn over time, taxed as ordinary income when withdrawn. For an owner in a high bracket today who expects a lower bracket in retirement, that deferral is the main benefit. Utah follows the federal treatment for the deduction, since Utah tax starts from federal adjusted gross income.
A hypothetical example
Hypothetical. Two physicians in their fifties own a Utah practice with a handful of younger employees. They already make full 401(k) deferrals and a profit-sharing contribution. An actuary's illustration shows that adding a cash balance plan would let each of them contribute and deduct a much larger amount this year, with a smaller contribution for each employee. The partners compare the tax saved against the employee cost, the higher administration fees, and the commitment to fund the plan for several years. If the practice's profit is uneven, or one partner plans to leave soon, the answer may change.
When should a practice look at one?
Well before the end of the tax year. Since the SECURE Act of December 2019, an employer can adopt a new plan as late as its tax return deadline, including extensions, and treat it as adopted on the last day of the tax year just ended (Internal Revenue Code section 401(b)(2), as amended by SECURE Act section 201). The design work takes time, though, so waiting until the deadline leaves little room. A buy-in of a new partner or a planned sale also changes the design.
Owning a practice opens retirement plan designs that employees cannot use. Our page for physicians and dentists explains how a CPA and a fiduciary advisor work the plan, the practice and the taxes as one picture.
Educational only. Not investment, tax, or legal advice. Every situation is different; the right answer depends on the numbers, and that's what the strategy session is for. Investing involves risk, including possible loss of principal.