Cash balance plans: A game-changer for high-income business owners

How you can boost retirement savings and slash your tax liability.

It’s not uncommon for business owners to neglect their own retirement savings in favor of reinvesting profits to grow their business. Then when it’s time to catch up on contributions, annual limits for IRAs and 401(k)s don’t seem to be enough to make up the difference.

For high-earning business owners, a cash balance plan may be the ticket. Along with accelerated retirement savings for you above the annual limits of defined contribution plans, large tax-deferred contributions can allow for potentially lucrative tax savings for your business.

What is a cash balance plan?

A cash balance plan is a type of defined benefit program or pension plan. They are employer-managed funds that don’t rely on employee contributions. Cash balance plans are one of the fastest-growing retirement plans, having grown 15 times more popular in the last 20 years according to the National Cash Balance Research Report. They’re often paired with a company’s 401(k) and profit-sharing plans.

Cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which guarantees a minimum amount if the plan is terminated and the employer can’t meet its obligations. Generally, assets are protected from creditors, but exceptions may apply depending on business structure and state laws.

Each covered employee has an individual account with the option of a lifetime annuity or a specified lump sum. Distributions from the account are derived from a stated account balance.

As an employer, offering a cash balance plan is an attractive incentive for employees. It also has tax benefits for the business. Employer contributions, which can be substantial, are tax deductible. And the fund grows tax-deferred for participants.

Advantages and disadvantages

One of the major benefits of a cash balance plan, especially if you’re interested in starting an account to catch up on retirement savings for yourself, is the high contribution limit. The lifetime limit for cash balance plans is $3.5 million as of 2025, but annual contribution limits are determined by your salary, age and the target date and balance of the fund.

The lifetime of a cash balance plan is about five years, on average. A plan participant leaving an employer typically has four options (and may engage in a combination of these options) for the final balance:

1. Leave the money in the former employer’s plan, if permitted;

2. Roll over to a new employer’s plan, if one is available and rollovers are permitted;

3. Roll over to an IRA;

4. Cash out the account value.

Another bonus of these plans is the ability to contribute to other retirement savings vehicles at the same time. You don’t have to choose between a 401(k) and cash balance plan, for example; you can have both.

One of the downsides to cash balance plans is that you, the employer, bear all the investment risk. So, if the plan underperforms, the employer is responsible for making up the difference with increased contributions.

There is also a minimum required annual payment, and plans are required to be in place for three to five years.

These plans can also be more costly to set up and maintain because they require an actuary to ensure they perform well enough to meet balance requirements. But, in the long run, they may be more cost-effective because they have high tax-deferred contribution limits and significant tax deductions.

Something else to remember is that while the growth is tax-deferred, withdrawals will be taxed.

Ideal candidates

Cash balance plans are ideal for high-earning business owners who can withstand contributing large sums of their salary to the plan to reduce their company’s taxes. While larger organizations can certainly offer cash balance plans, sole proprietors up to businesses with up to 10 tend to be best suited.

Depending on the business owner’s goals, these plans offer flexibility in specifying classes or contribution levels among employees as well.

If you’re looking to boost your retirement savings, offer an additional incentive to employees and take advantage of significant tax deductions, cash balance plans are worth exploring.

Cash Balance Plans are long-term retirement savings vehicles. Withdrawals are subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as financial advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.