Cash Balance Plans: Funding and Tradeoffs for Business Owners

A pension commitment through your business

A cash balance plan is a type of defined benefit pension. It can be worth investigating when a profitable business wants to provide additional retirement benefits, but the deduction is only one part of the decision.

An enrolled actuary determines the funding requirements. Defined benefit plans can support larger contributions than defined contribution plans, but involve more administration and funding obligations. They can coexist with other retirement plans. IRS defined benefit plan guidance.

Ask for a business-specific proposal

A generic age-based contribution chart is not a funding quote. Give the actuary accurate owner and employee information, compensation, existing retirement benefits, and the amount of cash the business can commit.

Ask for a proposal that separates:

• Owner benefits and employee benefits.
• Expected contributions and required funding under less favorable scenarios.
• Setup, administration, actuarial, investment, and termination costs.
• The effect of combining the plan with an existing 401(k).

Review the proposal with the CPA so the funding plan and the anticipated deduction fit together. Contribution and deduction limits require plan-specific calculations. IRS Publication 560.

Test the commitment against uneven income

The question is not just how much you can contribute in a strong year. Ask what happens if revenue falls, an owner wants to retire, an employee is hired, or the business is sold.

Keep operating cash needs separate from the retirement contribution budget. A large projected deduction is less useful if the funding commitment makes a weak year harder to manage.

Compare it with your existing plan

Start by reviewing what your current Solo 401(k) or employee retirement plan already provides. Then ask whether the additional pension benefits justify the cost and commitment. Do not assume a fixed employer-contribution percentage applies to every combined arrangement.

Before adopting a plan, obtain written funding projections, an administration calendar, and an explanation of how future changes or termination would work. If a sale is on the horizon, include the plan in your business exit preparation.

Planning your next step

See what a financial plan includes, learn about Ben Stauffer, or book an introductory call.

This is educational information, not personalized tax, legal, or investment advice. See disclosures.