Cash Balance Plans: $117,500 More Than a 401(k) Allows, Funded Every Year

Owners who max out a 401(k) and still have six figures of profit they will not spend want to know where else it can go before tax. For many of them the answer is a cash balance plan, a pension that sits next to the 401(k) and is limited by the benefit it promises rather than by a contribution cap.

In the example below, an owner who could put $72,000 into a 401(k) for 2026 puts away $189,500 with a cash balance plan added, and the extra $117,500 cuts federal income tax by $41,125.

In return, you commit to funding it. The plan's actuary sets a minimum each year, it is due whether or not the year was good, and a plan shut down after a couple of years invites the question of whether it was ever a real plan. It fits steady, high profit and few employees.

1. A pension that looks like an account

A cash balance plan is a defined benefit plan. The IRS describes it in its issue snapshot on cash balance plans: benefits are based on a hypothetical account balance, increased with principal credits (usually a share of pay) and adjusted with interest credits that cannot exceed a market rate of return.

The account exists only on the plan's books. The money sits in one trust, and the employer carries the investment risk. If the trust earns less than the interest credit, the company makes up the gap with a larger contribution later. If it earns more, the next contributions shrink. Because it is a pension, every pension rule applies: the benefit limit, minimum funding, actuarial valuations and, in many cases, PBGC insurance.

2. The 2026 limits that cap it

A 401(k) is capped by what goes in. For 2026 that is $72,000 of total annual additions, of which $24,500 can be the owner's own deferrals, per IRS Notice 2025-67.

A cash balance plan is capped by what comes out. Under section 415(b), the annual benefit, stated as a straight life annuity, cannot exceed the lesser of a dollar limit or 100% of your average pay for your highest 3 years. The same notice sets the 2026 dollar limit at $290,000 and the most pay any plan can count, under section 401(a)(17), at $360,000. The dollar limit applies to a benefit starting at age 62 and is reduced for an earlier start. It is also cut by a tenth for each year short of 10 years of participation, so a new plan grows into the full limit.

Pay means W-2 pay for an S corporation owner. The IRS retirement plan FAQ for S corporations says shareholder distributions do not constitute earned income for retirement plan purposes. A very low salary therefore caps the pension, which is a second reason to set a reasonable S corporation salary with care.

3. Why the contribution grows with age

The limit in section 2 is a benefit at retirement, not a yearly deposit. The actuary converts it to a lump sum using the interest and mortality assumptions section 415 prescribes, and that lump sum is the most your hypothetical account can be worth when the benefit starts. An owner at 40 has more than 20 years of pay credits and interest to reach that ceiling, so each year's credit has to stay small. An owner at 55 has 7, so each credit can be much larger. But with 7 years of participation at 62, section 415(b)(5) cuts the 2026 dollar limit to 70%, or $203,000. The 100%-of-pay limit is cut the same way for each year of service under 10. With 7 years of service and $250,000 of high-3 average pay, it is $175,000, and that is the cap. The plan design sets your pay credit, the actuary turns it into a required contribution, and both rise as the years left get fewer.

That is why the plan tends to fit owners in their 50s and early 60s. We do not quote a typical contribution by age, because it depends on the plan's interest credit, its retirement age, your pay history and the rates in the year of the valuation. The actuary's illustration is the number to plan with.

4. One owner, two ways, to the dollar

The assumptions are ours, chosen to show the mechanics. A married owner filing jointly runs a consulting S corporation alone, with no employees. For 2026 the company pays a $250,000 salary, the owner defers $24,500 pre-tax into the company 401(k), and profit after salary and payroll tax is $600,000 before any employer retirement contribution. No other income, the $32,200 standard deduction, federal income tax only. The $150,000 cash balance contribution is an assumed actuarial figure for this example, inside the plan's deductible maximum, not a typical one.

Total going into plans rises from $72,000 to $189,500. The extra $117,500 is deducted at 35%, so federal income tax falls by $41,125. Both taxable incomes sit inside the 35% bracket in Rev. Proc. 2025-32 and above $553,500, where a consulting business gets no qualified business income deduction under section 199A. Payroll tax does not change, because the salary does not change.

The $41,125 is a deferral, not a permanent saving. What the plan pays out later is taxed as ordinary income under section 402, at whatever rate applies then.

5. Why the profit-sharing drops to 6%

When one person is in both a defined contribution plan and a defined benefit plan, section 404(a)(7) caps the combined deduction at the greater of 25% of pay or the pension's minimum required contribution. On a $250,000 salary, 25% is $62,500, far below what the example deducts.

Two carve-outs make the pairing work. Elective deferrals never count toward the combined limit (section 404(n)). And employer contributions to the 401(k) of up to 6% of pay are disregarded, so the pension can be deducted up to its own limit. That limit, in section 404(o), is much higher. It runs to the plan's funding target plus normal cost plus a cushion that starts at 50% of the funding target, less plan assets. Above 6%, only the excess counts against the combined cap. A plan that PBGC insures is left out of the 404(a)(7) test entirely, which matters once a practice outgrows the exemptions in section 7.

6. The funding bill comes every year

Under section 430, the minimum required contribution is the plan's target normal cost for the year, plus an installment toward any shortfall. The payment for a plan year is due 8½ months after it ends, so September 15, 2027 for a calendar 2026 plan year. After a year with a funding shortfall, section 430(j)(3) also requires quarterly installments, due April 15, July 15, October 15 and January 15 for a calendar-year plan. Miss it and section 4971 imposes a 10% excise tax on the unpaid amount, with a 100% tax if it stays unpaid.

Between that minimum and the 404(o) maximum, you choose. That range is the plan's flexibility, and in a weak year the minimum can be modest if earlier years were funded above it. It does not go to zero by choice.

The plan also has to be meant to last. Treasury Regulation 1.401-1(b)(2) says a plan is a permanent program, and abandoning it within a few years for any reason other than business necessity is evidence it was never a bona fide plan. The regulation names no number of years. We treat a cash balance plan as a multi-year commitment and model at least the next several years of contributions before one is set up.

7. When PBGC insurance applies

The Pension Benefit Guaranty Corporation insures most defined benefit plans, and insured plans pay premiums. ERISA section 4021 exempts two groups owners often fall into:

• Owners only. A plan maintained exclusively for substantial owners is exempt under 4021(b)(9). A substantial owner is a sole proprietor, a partner with more than 10% of capital or profits, or a shareholder with more than 10% of the stock, at any time in the prior 60 months.
• Small professional practices. A plan of a professional service employer that has never had more than 25 active participants is exempt under 4021(b)(13). The statute's list of professionals includes physicians, dentists, attorneys, public accountants, public engineers, architects and actuaries.

A covered plan pays a 2026 flat premium of $111 per participant, plus $52 per $1,000 of unfunded vested benefits capped at $751 per participant, per PBGC's premium rate table. An exempt plan, such as one covering only the owner, pays none.

8. What employees change

With staff, the plan cannot be just for you. Section 401(a)(26) requires a defined benefit plan to benefit, every day of the year, at least the lesser of 50 employees or the greater of 40% of employees or 2 employees. The plan must also meet the participation rules of section 410, and section 401(a)(4) bars contributions or benefits that discriminate in favor of highly compensated employees: anyone owning more than 5%, plus employees whose prior-year pay tops a threshold Notice 2025-67 keeps at $160,000.

So staff credits become part of the price. Compare your tax saving with what their credits and the extra testing cost, using the actuary's numbers.

9. Paperwork and the deadlines for 2026

A plan covering only owners and their spouses files Form 5500-EZ, and none is required in a year when all of the employer's one-participant plans hold $250,000 or less at year end, except the final year. The Form 5500-EZ instructions still require an enrolled actuary to complete and sign Schedule SB each year, kept in the plan's records rather than filed. Plans with employees file Form 5500 or 5500-SF, and the Department of Labor's Form 5500 instructions require Schedule SB for most single-employer defined benefit plans.

There is still time for 2026. Section 401(b)(2) lets an employer adopt a plan after year end, up to the due date of its return including extensions, and treat it as adopted on the last day of the year. Section 404(a)(6) treats a contribution paid by that same date as made in the prior year. For a calendar-year S corporation that date is September 15, 2027 only if Form 7004 is filed by March 15, 2027. Without it, both deadlines are March 15, 2027. The minimum funding deadline in section 6 stays September 15, 2027 either way.

A plan adopted this way in 2027 files no 2026 Form 5500-EZ, though the actuary still signs a 2026 Schedule SB. Figure 2's 5500-EZ dates apply to a plan already in place during 2026 that has to file.

10. What to do before adopting one

• Check that the profit repeats. Look at three years, not one. The minimum contribution assumes next year looks like this one.
• Set the salary first. W-2 pay drives both the 415(b) limit and the 6% profit-sharing room, and it has to be a reasonable salary on its own terms.
• Get the actuary's range. Ask for the minimum and maximum deductible contribution for this year and a projection of the next five.
• Price the staff. If you have employees, get the testing results and the cost of their credits before you sign.
• Put the dates on a calendar. The extended return date, the funding date and the 5500 date, every year.

We build that side-by-side as part of our tax planning work: the 401(k) alone against the 401(k) plus a pension, at your salary, your profit and your state. Book a call with your last two business returns, your W-2, a headcount with ages and pay, and any plan documents you already have. If the pension costs more than it saves at your numbers, you will hear that from us before an actuary is hired, and if it pays, there is still time to act for 2026.

General information for owner-operators, not tax advice. Thresholds change and state treatment varies; confirm current requirements for your own facts before acting.