How much can I contribute to a cash balance plan?

Far more than a 401(k), and the amount rises steeply with age because the contribution is actuarially calculated to fund a target benefit by retirement. Indicative first-year figures run from roughly $100,000 in the late thirties to $200,000-$300,000 or more for owners in their fifties and early sixties. The precise number is determined by an actuary from your age, compensation and the plan's benefit formula, and the lifetime account cap is roughly $3.7 million.

Do I have to cover my employees?

Yes. A cash balance plan is a qualified plan subject to coverage and nondiscrimination testing, so staff must receive a meaningful benefit. In a typical design paired with a safe harbor 401(k) and profit sharing, non-owner staff receive somewhere around 5% to 7.5% of pay across the plans. Whether the arrangement is worthwhile turns largely on the ratio of owner compensation to staff payroll.

What is the downside of a cash balance plan?

It is a funding obligation, not an option. Contributions are required annually whether or not the business has a good year, within a limited range, and the IRS expects a plan to be permanent — in practice at least three years absent a genuine business reason. It also requires an actuary each year, adding administrative cost, and every dollar deducted becomes fully taxable ordinary income when it is eventually withdrawn.

Can I have a cash balance plan and a 401(k)?

Yes, and that is the usual design. The 401(k) captures elective deferrals and a safe harbor contribution, and the cash balance plan sits on top. Combining them does limit the profit sharing component — the employer profit sharing allocation is generally capped at 6% of eligible pay rather than 25% when a defined benefit plan is also in place.

Cash Balance Plans for Illinois Business Owners & Practice Owners

A profitable practice owner or business owner in their fifties, earning several hundred thousand dollars, has usually done the obvious things. Maxed the 401(k). Added profit sharing. Looked at an HSA. And still faces a combined federal and Illinois marginal rate north of 40% on everything above it.

The 2026 defined contribution ceiling is $72,000. For someone earning $600,000 that shelters twelve percent of income, and the rest is taxed at the top. A cash balance plan is the structure that raises that ceiling — for many owners in their late fifties, by a factor of four or more.

It is also a genuine commitment, and it creates a tax problem later that has to be planned for. Both halves of that matter.

What it actually is

A cash balance plan is a defined benefit pension plan — the same legal category as the traditional pensions that used to be common — designed to look and feel like a retirement account.

Each participant has a hypothetical account. Every year the company credits it with a contribution defined by the plan formula, plus an interest crediting rate specified in the plan document (often a fixed rate around 4% to 5%, or one tied to a benchmark). The account is hypothetical because the plan's assets are pooled and the company, not the participant, carries the investment risk. If pooled returns fall short of the credited rate, the company makes up the difference; if they exceed it, future contributions can fall.

The reason the contributions are so much larger than a 401(k)'s is that they are calculated backwards from a target benefit at retirement. The fewer years remaining, the more must go in each year to get there. Which is why the numbers scale so steeply with age.

Owner's age	Indicative first-year cash balance contribution
Late 30s	~$100,000 – $120,000
Mid 40s	~$140,000 – $175,000
Early 50s	~$190,000 – $240,000
Late 50s to early 60s	~$260,000 – $350,000

Indicative first-year ranges for a cash balance plan alone, at compensation at or near the 2026 limit of $360,000. Your figure is calculated by an actuary from your age, compensation, the plan formula and your census, and will differ. A 401(k) with deferrals of $24,500 (plus catch-up: $8,000 at 50 and over, $11,250 for ages 60 to 63) and a limited profit sharing contribution generally sits on top.

These plans have a ceiling as well as a floor. Total lifetime accumulation for one participant is capped — currently in the region of $3.7 million — and the annual benefit a plan may fund is limited to $290,000 for 2026. So a plan has a working life. It fills, and then it has done its job.

What it costs you

The deduction is real, and so are four obligations that come with it. An honest look at a cash balance plan starts here rather than with the tax saving.

1. You must fund it, in bad years too

A 401(k) profit sharing contribution is discretionary. A cash balance contribution is a funding obligation. The plan can be designed with a range rather than a single figure, giving some flexibility year to year, but the floor is mandatory and missing it has consequences. This is the reason the plan suits a business with durable, predictable profit and suits a cyclical one poorly.

2. Your employees participate

A qualified plan cannot exist solely for the owner. Coverage and nondiscrimination testing require staff to receive a meaningful benefit, and in a typical combined design that lands somewhere around 5% to 7.5% of pay across the cash balance and 401(k) plans. Adding a defined benefit plan also compresses the profit sharing side: the employer allocation is generally capped near 6% of eligible pay rather than the 25% otherwise available.

Whether the arithmetic works comes down to one ratio — owner compensation against staff payroll. A three-dentist practice with eight staff usually works well. A twenty-employee business with one owner may not.

3. It is meant to be permanent

The IRS expects a qualified plan to be established with the intent of permanence. A plan opened for one exceptional year and closed the next invites scrutiny. Three years is the practical minimum most advisors will describe, and a genuine business reason is needed to unwind earlier.

4. It requires an actuary, annually

Contributions must be certified by an enrolled actuary each year, on top of the usual plan administration and filings. Costs vary, but a few thousand dollars a year is typical. Against a six-figure deduction that is not the deciding factor — but it is a real, recurring expense that a 401(k) alone does not carry.

The plan is a tool, not a decision. It fits a specific profile: consistently high income, a favourable owner-to-staff ratio, an owner within roughly fifteen years of retirement, and enough cash flow stability to commit for several years. Where those hold it is often the largest single tax lever available to a private business. Where they do not, it becomes an expensive obligation.

The part that gets left out

A cash balance plan does not eliminate tax. It moves it.

Every dollar deducted today comes out later as ordinary income — not capital gain — for you or for whoever inherits it. Fund a plan aggressively for ten years and you may arrive at retirement with two or three million dollars of entirely pre-tax money, on top of an existing 401(k) and IRA, all of it eventually subject to required minimum distributions.

That is a good problem to have and it is still a problem. It can push you into higher brackets in your seventies than you occupied while working, drive Medicare premium surcharges, and — under current inherited IRA rules requiring most non-spouse beneficiaries to empty the account within ten years — land on your children during their own peak earning years.

The strategy is not to avoid the plan. It is to know from the outset where the money comes back out.

The window after you stop working and before Social Security and RMDs begin is usually the lowest-income stretch of an owner's adult life. Those years are where large deferred balances get converted to Roth at rates well below the ones you deducted at.
Illinois does not tax retirement income — including Roth conversions — so an Illinois resident converts at federal rates alone. That is a meaningful and often unrecognised advantage over a resident of most other states.
The years around a business sale distort everything. Funding hard in the high-income years before an exit and converting in the low-income years after it is a legitimate sequence, but it only works if someone is looking at both ends at once.

Deducting at over 40% and withdrawing at 22% or 24% is where the real gain in this strategy lives. Deducting at 40% and withdrawing at 37% because nobody planned the exit is a great deal less impressive. The plan design and the distribution plan are one decision, and they are usually made by different people years apart.

Who this tends to suit

Physicians and dentists in private practice — high compensation, small staff, stable revenue. Structurally the best fit there is.
Owners of businesses doing $5 million to $25 million in revenue where profit is consistent and the owner takes substantial compensation.
Professional practices — law, accounting, consulting, engineering — particularly partner groups of similar age.
Owners inside fifteen years of an exit who are trying to move a decade of peak earnings out of the top bracket and into an account they will draw from later.
Anyone whose CPA has told them there is nothing left to do. That is often true within the plans they already have, and not true of the plans they do not.

How we actually do this

A cash balance plan is not a product we sell you. It is a structure that gets built by a small group of specialists, and our role is to assemble that group and run it — the same quarterback role we take everywhere else.

A third party administrator and enrolled actuary design the plan, set the benefit formula, run the annual valuation and handle the testing and filings. We have TPAs we work with regularly and will bring in the one that fits your census.
A custodian holds the plan assets. We manage the investments against the plan's interest crediting rate, which is a genuinely different job from managing a personal portfolio — the target is to track a defined rate, not to maximise return.
Insurance carriers where the design calls for it, and where guarantees rather than market exposure are the right way to support the credited rate.
Your CPA stays central. The deduction lands on the business return and the design has to fit the entity, the compensation structure and the rest of your tax picture.

We have put these in place before, and the honest first step is not a plan document. It is running your census and your compensation through an actuary to see what the numbers actually come back as — because for roughly half the owners who ask us about this, the answer is that the staff cost makes it not worth doing, and it is better to find that out in a week than after the plan exists.

If a sale is part of the picture, the sequencing between the two matters. We cover the wider timeline on exit planning, and what deal structure does to your net proceeds on selling your business in Illinois.

Is this worth running the numbers on?

The answer turns on a handful of facts — your age, your compensation, your staff census and how stable the profit is. It is a short conversation to find out. We work with owners and practice owners across Chicago and the North Shore.

Take the Exit Readiness Assessment Schedule a Conversation

Twelve questions, about three minutes — scored across the business, the finances and you.
Or go straight to 30 minutes with Ara Bayindiryan, no obligation.