At a glance
- What it is
- A defined benefit (pension) plan, layered on top of a 401(k), where each participant has a hypothetical account that grows with set pay and interest credits.
- What it saves
- Federal and Oklahoma income tax on large business contributions, which can reach $100,000 or more a year for owners 50 and older.
- Best fit
- Steady profits of $250K or more, owners 45 and up.
- Main catch
- Contributions are required each year, not optional, and the plan should run for several years.
- Setup
- Needs a plan document, an actuary, and annual filings.
Key takeaways
- A cash balance plan is a pension plan added to a 401(k), whose deductible contributions can reach $100,000 or more a year for owners 50 and up.
- It fits owners 45 and up with steady profits of $250K or more who already max out a 401(k).
- In the illustrative example, a 55-year-old S corp owner's $120,000 contribution saves about $38,400 federal and $5,400 Oklahoma income tax.
- The catch: contributions are required each year, the plan should run several years, and it needs an actuary and annual filings.
Watch the story
A one-minute story about this strategy. Illustrative story; the people are fictional and are not clients. See all story videos.
The numbers
Picture an S corp owner, age 55, with no employees, a $200,000 W-2 salary, and steady profits. Suppose the plan’s actuary sets this year’s cash balance contribution at $120,000. The real number depends on age, pay, and plan design.
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Cash balance plan contribution (set by the actuary) | $120,000 |
| 401(k) employee deferral (2026 limit) | $24,500 |
| 401(k) catch-up, age 50 and older (2026) | $8,000 |
| 401(k) profit share: 6% × $200,000 | $12,000 |
| Total retirement contributions | $164,500 |
The profit share is held to 6% of pay here because, when a business sponsors both plans, employer contributions to the 401(k) above 6% of pay count against a combined deduction limit. Plan design can sometimes do better; the actuary will show the options.
Business tax (the S corp)
| Cash balance contribution deducted by the S corp | $120,000 |
Personal tax (federal and Oklahoma), from the cash balance piece alone
| Lower S corp profit passed through to the owner | $120,000 |
| Federal income tax saved (32% bracket): $120,000 × 32% | about $38,400 |
| Oklahoma income tax saved (4.5%): $120,000 × 4.5% | about $5,400 |
If the S corp makes the Oklahoma PTE election, the Oklahoma savings show up on the business’s PTE tax instead of your personal return. Federal savings are somewhat lower if you also claim the QBI deduction.
This is a tax deferral, not a tax-free deduction. The money is taxed when it comes out in retirement, ideally at a lower rate than you’re paying today.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- Adopt the plan. The business adopts a cash balance plan document, usually alongside a 401(k).
- The actuary sets the contribution. Based on your age, pay, and the plan’s formula, within a range the business can choose from each year.
- The business contributes and deducts. Contributions are deductible to the business, within the actuary’s limits.
- Your account grows. Each year it gets a pay credit and an interest credit. At retirement or plan termination, the balance can usually be rolled into an IRA.
Who it fits
- Owners with steady profits of $250K or more who are already maxing out a 401(k).
- Owners 45 and up, since the allowed contribution grows with age.
- Businesses with few or no employees, or where owners are older than most staff.
When it doesn’t fit
- Businesses with uneven profits that can’t count on making the contribution every year.
- Owners who may need the cash in the business in the next few years.
- Businesses with many employees, where required employee contributions can outweigh the owner’s benefit.
The rules
- Required contributions. A defined benefit plan has minimum funding requirements. Missing them brings excise taxes.
- Permanence. The IRS expects a qualified plan to be permanent. Plans are usually designed to run at least several years.
- Employee coverage. If you have employees, the plan has to cover a minimum number of them and pass nondiscrimination testing.
- Benefit cap. The tax code limits the benefit the plan can ultimately provide, which is why older owners can contribute more each year.
- Timing. A new plan can generally be adopted as late as the business’s tax return due date, including extensions, and still count for that year.
Risks and costs to weigh
- Administration costs. Actuary fees, plan document, and annual filings cost money every year. The tax savings need to clearly outweigh them.
- A bad year. If profits fall, you may still owe the minimum contribution unless the plan is amended in time.
- Investment results. If investments fall short of the plan’s interest credit, the business may need to contribute more; if they beat it by a lot, the plan can become overfunded.
How we handle it for clients
With a Cannon & Brown tax plan, we test whether your profits and age support a cash balance plan, work with the plan actuary on the contribution range, and fit the contribution into your quarterly tax projections so the deduction lands where it saves the most. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The business owner and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes an S corp owner age 55 with no employees, a $200,000 W-2 salary, a $120,000 actuary-determined contribution, a 32% federal bracket, and a 4.5% Oklahoma rate; your actual contribution depends on your plan’s actuarial calculations. This page is educational and is not tax advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about the cash balance plan
Can I have a cash balance plan and a 401(k) at the same time?
Yes, it's usually set up alongside a 401(k). When a business sponsors both, employer contributions to the 401(k) above 6% of pay count against a combined deduction limit, so the actuary shows the design options.
What happens to a cash balance plan if my business has a bad year?
You may still owe the minimum contribution unless the plan is amended in time, and missing required contributions brings excise taxes. That's why it fits businesses with steady profits.
Is it too late to set up a cash balance plan for this tax year?
Not necessarily. A new plan can generally be adopted as late as the business's tax return due date, including extensions, and still count for that year.
Are cash balance plan contributions tax-free?
No, it's a tax deferral. The money is taxed when it comes out in retirement, ideally at a lower rate than you're paying today.
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