The short answer
A cash balance plan is a defined benefit pension that works like a 401(k) on paper. Because the IRS limits the benefit rather than the yearly contribution, older owners can put away far more than a 401(k) or SEP IRA allows. The trade-off is a funding commitment, annual actuarial work, and contributions for eligible employees.
| 2026 limit | Amount |
|---|---|
| Annual benefit a defined benefit plan can fund | $290,000 |
| Compensation counted toward contributions | $360,000 |
| 401(k) plus profit sharing, for comparison | $72,000 |
Source: IRS Notice 2025-67. The 401(k) figure rises to $80,000 at age 50 and $83,250 at ages 60–63 with catch-up contributions.
How a cash balance plan works
Each participant has an account, but it is a bookkeeping account, not a pile of money they direct. Every year the plan adds two credits to it:
- A pay credit: a percentage of pay or a flat dollar amount set in the plan document. Owners and employees can be placed in different groups with different credits.
- An interest credit: a fixed rate, such as 4% or 5%, or a rate tied to Treasury yields. It accrues whether or not the plan’s investments earn that much.
The business funds the plan, deducts the contributions, and owns the investment risk. If the investments fall short of the interest credit, the business makes up the difference in later years. If they run well ahead, the surplus can reduce future contributions. That is why plan assets are usually invested more conservatively than a typical 401(k).
Contributions are larger at older ages because the plan is funding a target benefit with fewer years left to retirement. The IRS caps that benefit, not the deposit. Once the account reaches the lump-sum value of the maximum benefit, contributions stop.
2026 contribution ranges compared with other plans
The ranges below are the maximums each structure allows for a single owner. Most owners pair a cash balance plan with a 401(k) and profit sharing plan rather than using it alone.
| Plan | 2026 maximum per owner | What sets the limit | Employee cost |
|---|---|---|---|
| SEP IRA | Up to $72,000; no catch-ups | 25% of pay (about 20% of net self-employment income) | Same percentage of pay for every eligible employee |
| 401(k) with profit sharing (including solo 401(k)) | $72,000; $80,000 at 50+; $83,250 at 60–63 | Fixed dollar cap on total additions | Flexible; often a safe harbor contribution of 3% to 4% of pay |
| Cash balance plan alone | About $124,000 at 40 to $349,000 at 65 | Age, pay, and the $290,000 benefit limit, set by an actuary | Pay credits for covered employees, set by plan design |
| 401(k), profit sharing and cash balance together | About $196,000 at 40 to $429,000 at 65 | Both sets of limits, tested together | Commonly 5% to 7.5% of pay for staff in total |
Cash balance figures are approximate maximums from Milliman’s 2026 table and are not specific to any plan. A traditional defined benefit plan reaches similar contribution levels; cash balance plans are more common for owners because the account format is easier to explain to employees and to roll over.
Approximate maximum contributions by age
| Age | 401(k)* | Cash balance | Total |
|---|---|---|---|
| 40 | $72,000 | $124,000 | $196,000 |
| 45 | $72,000 | $159,000 | $231,000 |
| 50 | $80,000 | $204,000 | $284,000 |
| 55 | $80,000 | $262,000 | $342,000 |
| 60 | $83,250 | $336,000 | $419,250 |
| 65 | $80,000 | $349,000 | $429,000 |
*401(k) deferrals plus profit sharing, including catch-up contributions. Source: Milliman, Cash Balance Plan 101 (2026 maximums). Actual limits are set by the plan actuary and depend on compensation, years of service, plan design and interest rates. Your real number may be well below these figures.
The ranges are wide for a reason. Two 55-year-old owners can have very different limits depending on how much they are paid, how long they have worked for the business, and how the plan credits interest. Treat the table as a sense of scale, and expect an actuary’s proposal to set the actual figure.
Wondering what your business could contribute?
We work with plan actuaries and your CPA to price a design around your income, your staff, and your timeline to retirement or a sale.
Schedule a callWho a cash balance plan fits
- Consistently profitable owners and partners in medical, dental, legal, consulting, engineering and similar professional practices, or closely held operating businesses.
- Owners in their late 40s or older, where the age-weighted contributions become large.
- People already maxing out a 401(k) who still face a top-bracket tax bill.
- Businesses where the owners are older and paid more than the staff, so most of the contribution goes to the owners.
- Owners planning a sale or retirement within several years, who want to pull large deductions into their highest-income years.
It is usually a poor fit for businesses with uneven profits, owners who need the cash for operations, or a large staff that is older and better paid than the owner.
Employees, testing and coverage
A cash balance plan is a qualified plan, so it has to treat rank-and-file employees fairly. Two rules drive the design:
- Minimum participation: a defined benefit plan must benefit at least 50 employees or 40% of the workforce, whichever is fewer. A one- or two-owner business can still have a plan that covers only the owners when there are no eligible employees.
- Nondiscrimination testing: the 401(k), profit sharing and cash balance plans are usually tested together. Staff commonly receive a total employer contribution of about 5% to 7.5% of pay, which is often far less than the owners’ tax savings.
Costs and commitments
This is a pension, not a profit sharing plan
Contributions are required each year within the range the actuary sets. You can change the formula for future years, but the IRS expects the plan to run for several years, commonly at least three to five, unless there is a real business reason to end it, such as a sale.
- Actuarial and administration fees for setup, annual valuations, and testing. They rise with the number of employees and are deductible to the business.
- PBGC insurance premiums of $111 per participant for 2026 apply to many plans. Plans covering only owners, and professional practices with 25 or fewer participants, are generally exempt.
- Investment discipline. Returns well above or below the interest credit both cause problems, so plan assets are typically invested to track that rate rather than to maximize growth.
- Entity type matters. For an S corporation owner, contributions are based on W-2 salary, not distributions. For partners and sole proprietors, they are based on net self-employment earnings.
Deadlines
A new plan can generally be adopted as late as the business’s tax-filing deadline, including extensions, and still apply to the prior year. Contributions are generally due by that deadline and no later than eight and a half months after the plan year ends. Starting before year-end still helps: it leaves time for the actuary’s design, employee testing, and coordination with your 401(k) and profit sharing contributions.
When you sell the business or retire
The plan is usually terminated. Each participant’s vested balance can be paid as a lump sum and rolled into an IRA or another employer plan without current tax, which lets the money keep growing tax-deferred. Many owners set up a plan three to five years before a planned exit, so several years of large deductions land in their highest-income years, and then roll the balance into an IRA as part of the sale. See our business planning guide for the exit side of that plan, and our rollover guide for what to do with the money afterward.
Pennsylvania owners
Pennsylvania does not follow federal rules on retirement plan contributions in every case, particularly for partners and sole proprietors. The federal deduction is usually the main benefit, but ask your CPA how the plan will be treated on your Pennsylvania return before you choose a contribution level. See our Pennsylvania retirement tax guide for how distributions are taxed later.
Frequently asked questions
What is a cash balance plan?
A cash balance plan is a type of defined benefit pension plan that looks like a 401(k) to the participant. Each year the employer credits each participant's account with a pay credit (a percentage of pay or a flat dollar amount) and an interest credit at a rate set in the plan. The employer makes the contributions, deducts them, and bears the investment risk. Because it is a defined benefit plan, contributions are not limited to the $72,000 defined contribution cap for 2026.
How much can I contribute to a cash balance plan in 2026?
It depends mainly on age and compensation, and an actuary sets the exact figure each year. As a rough guide from Milliman's 2026 table, maximum cash balance contributions run from about $124,000 at age 40 to about $262,000 at 55 and $349,000 at 65. Paired with a 401(k) and profit sharing, total contributions can reach roughly $196,000 to $429,000 at those ages. Compensation counted toward the plan is capped at $360,000 for 2026.
Can I have a cash balance plan and a 401(k) at the same time?
Yes, and most owners do. The 401(k) with profit sharing covers deferrals and employer contributions up to $72,000 for 2026 ($80,000 at 50 and over, $83,250 at ages 60 to 63), and the cash balance plan sits on top of it. The two plans are tested together for fairness to employees, which usually means a profit sharing contribution for staff of roughly 5% to 7.5% of pay.
Do I have to include my employees in a cash balance plan?
Generally yes, if you have eligible employees. A defined benefit plan must cover at least 50 employees or 40% of the workforce, whichever is fewer, and the combined plans must pass nondiscrimination testing. Plans work best when the owners are older and more highly paid than the staff, because owners can then receive most of the contributions while employees still receive a meaningful benefit.
What happens if my business has a bad year?
A cash balance plan carries a funding obligation, so contributions cannot simply stop in a slow year the way profit sharing can. Most plans fund within a range the actuary calculates, which gives some flexibility, and the pay credit formula can be amended for future years. The IRS expects the plan to be maintained for several years, commonly at least three to five, unless there is a business reason to end it such as a sale.
What happens to a cash balance plan when I sell my business or retire?
The plan is usually terminated. Each participant's vested balance can be taken as a lump sum and rolled into an IRA or another employer plan without current tax. Many owners time the plan so that several years of large deductible contributions land in the years before a planned sale or retirement.
What is the deadline to set up a cash balance plan for 2026?
A new plan can generally be adopted as late as the business's 2026 tax-filing deadline, including extensions, and still apply to 2026. Contributions are generally due by that same deadline and no later than eight and a half months after the plan year ends. Setting the plan up before year-end leaves more time for design and employee testing.