Cash Balance Plans for Small Businesses
For Owners of Highly Profitable Small Businesses, a Cash Balance + 401(k) Plan Offers the Highest Contributions and Tax Savings.
As professional practices and small businesses flourish, owners often find themselves seeking ways to help secure their financial future and retirement. While many opt for traditional retirement plans like 401(k)s, the limitations imposed by the IRS on contribution amounts can leave them wanting more. This is where Cash Balance plans can step in, offering a potent solution for increased tax deductions and accelerated retirement savings.

Understanding the Cash Balance Plan

A Cash Balance plan is an IRS-approved qualified employer-sponsored retirement plan that falls under the category of defined-benefit pension plans. In these plans, the allowable contribution is determined based on a variety of factors including age, compensation, years of employment, and a specified benefit formula. Unlike traditional defined-benefit plans, Cash Balance plans incorporate both pay credits and interest credits, contributing to the retirement savings of both business owners and employees. Usually, these plans are combined with a Safe Harbor 401(k)/Profit Sharing plan, granting business owners more control over the participants in the Cash Balance plan. This strategic pairing enables business owners to potentially contribute two to three times what a 401(k) alone would allow. Moreover, contributions to Cash Balance plans, as well as Safe Harbor 401(k)/Profit Sharing plans, are tax-deferred, translating to immediate tax deductions in the year the contributions are made. This can result in tax savings, potentially reaching thousands of dollars.a

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Mechanics of a Cash Balance Plan

The design of a Cash Balance plan is orchestrated by a third-party administrator (TPA) or actuary. This plan usually encompasses both a Cash Balance and a 401(k) Profit Sharing plan, tailored to the business owner’s contribution and cash flow goals. Every year, a predetermined pay credit and interest credit are allocated to each participant’s Cash Balance account. However, the actual contribution amount may vary depending on the performance of the investments in the account. All the assets within the Cash Balance plan are typically invested in a single pooled trust investment account.

Roles in a Cash Balance Plan

  • Business: The business takes charge of funding the plan, handling investments, covering fees, and absorbing the investment risk.
  • Financial Advisor: Collaborating with the owner, the financial advisor facilitates the establishment of a pooled trust investment account for the Cash Balance plan and individual investment accounts for each participant in the 401(k) Profit Sharing plan. Additionally, the advisor often manages the assets in the Cash Balance plan and guides the owner on investment decisions.
  • TPA: The TPA designs and administers the plans in consultation with the business owner, financial advisor, and CPA. They also ensure the plan stays compliant with IRS regulations, providing ongoing consulting and actuarial services.
  • Participants: Cash Balance plan participants are promised a specific benefit, similar to a 401(k)-style account balance, upon retirement or termination. This benefit is portable and can be rolled over into an IRA for continued tax deferral.
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Tailoring the Retirement Program to Individual Goals

The customization of a retirement program starts with a deep dive into the business’s prospects, employee dynamics, and the owner’s retirement aspirations over the next few years. The program design is not only about maximizing contributions for the owner but also balancing it with the needs of employees. Owners can choose to contribute the maximum allowable amount or a specific figure that aligns with their financial situation. Family businesses can leverage Cash Balance plans to support succession planning and estate goals.

Suitability of Cash Balance Plans

Cash Balance plans are particularly well-suited for small business owners and professional practices looking to expedite retirement savings and trim down their tax liabilities. They generally work best for:

  • Business owners seeking larger, deductible contributions compared to SEP-IRAs or 401(k)s.
  • Owners aged 35 and above, earning over $250,000 annually.
  • Entrepreneurs with projected cash flow to contribute for several years.
  • Business owners willing to make limited contributions for specific employees.

In summary, the amalgamation of a Cash Balance plan with a Safe Harbor 401(k) plan offers business owners an avenue to optimize potential tax savings while retaining control over employee retirement benefits costs. For those who’ve outgrown simpler retirement plans, Cash Balance plans unlock the potential to contribute up to three or four times more. Partners can tailor contributions based on age, compensation, and individual financial needs. The flexibility extends to employee groups, where different “classes” and contribution levels can be established during plan design. By committing to funding the plans annually, business owners can experience tax deductions while accelerating their retirement savings. Cash Balance plans not only help to protect assets from creditors in the event of bankruptcy or lawsuits but also help to provide a secure path toward building retirement wealth.

While a cash balance pension is an excellent retirement plan option, you should choose one with caution. Compare it to other accounts and the tax treatment you expect to receive when you retire to see if it or another plan will work better for your financial situation.


Tax and/or legal advice is not offered by BLU Financial Planning. Please consult with your tax professional for additional guidance regarding tax-related matters.

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Remember, the essence of retirement is freedom, and with careful planning, we can help individuals unlock its true potential.

Empower your financial journey with BluFinancialplanning.com. Our team of experienced financial professionals are dedicated to providing personalized solutions for your financial needs. Whether you’re seeking guidance on retirement planning, investment strategies, or budgeting, we’re here to help. Contact us today to schedule a conversation  and take the first step towards financial success.

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