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Cash Balance Plans: A 2026 Year-End Guide for CPAs Advising Clients Seeking Additional Deductions and Retirement Savings

What Is a Cash Balance Plan?
A CB plan is a defined benefit plan, specifically, a statutory hybrid plan under IRC Sections 411(a)(13) and 411(b)(5), which expresses a participant’s benefit as a hypothetical account balance. Each year, the account receives a pay credit (a percentage of compensation or a flat dollar amount) and an interest credit (a fixed rate or a rate tied to a specified index). Under Treas. Reg. Section 1.411(b)(5)-1(d), the interest crediting rate may not exceed a market rate of return. Unlike a profit sharing plan, the employer bears investment risk, and contributions are actuarially determined and generally required annually under the minimum funding rules. Benefits must vest on a three-year cliff schedule (or faster), and participants may generally take a rollover-eligible lump sum or an annuity.

Contribution and Benefit Limits
CB plan limits are governed by Section 415(b), not Section 415(c). For 2026, the maximum annual benefit (expressed as a straight life annuity) is the lesser of $290,000 or 100% of the participant’s average compensation for the three consecutive highest-paid years. The compensation-based limit is reduced for fewer than ten years of service. The full dollar limit requires ten years of participation and is stated for benefits commencing at ages 62 to 65; the Section 401(a)(17) compensation cap is $360,000 for 2026. Because a CB contribution funds a target benefit over the participant’s remaining years to normal retirement age, older owners can contribute substantially more than younger ones. Annual contributions for owners in their late fifties and early sixties commonly range from roughly $150,000 to more than $300,000, depending on plan design, compensation, and actuarial assumptions.

Deductibility Rules
Under Section 404(o), the most an employer can generally deduct for a cash balance plan in a given year is the amount needed to fully cover three items, minus the assets already in the plan: the value of benefits participants have already earned (the “funding target”), the value of benefits participants are expected to earn during the current year (the “target normal cost”), and an extra “cushion” equal to 50% of the funding target plus an allowance for expected pay increases. However, even if that complicated calculation produces a smaller number, the employer may always deduct at least the minimum contribution required under the Section 430 funding rules. The enrolled actuary determines the permissible range and certifies the minimum funding information on Schedule SB to Form 5500. Under Section 404(a)(6), contributions made on account of the prior year by the employer’s return due date, including extensions, may be deductible for the prior year. The minimum funding deadline is 8 1/2 months after the plan year ends (September 15 for a calendar-year plan), and an unpaid minimum required contribution may trigger the 10% excise tax under Section 4971. Quarterly contributions may also be required.

Pairing a Cash Balance Plan with a 401(k) or Profit-Sharing Plan
The common design pairs a CB plan with an existing 401(k)/profit sharing plan: participants maximize elective deferrals, the employer makes a defined contribution, often about 6% of compensation, and the CB plan is sized to the deduction target. Section 404(a)(7) determines whether the combined deduction limit restricts that design. For plans not covered by PBGC, including a professional service employer plan that has never had more than 25 active participants, or a plan covering only substantial owners, employer DC contributions (other than elective deferrals) of up to 6% of DC plan compensation are disregarded. If DC employer contributions exceed 6%, only the excess counts toward the combined limit, which generally equals the greater of 25% of compensation or the amount necessary to satisfy the DB plan’s minimum funding standard (determined for this purpose as not less than the excess, if any, of the funding target over plan assets). This is why many non-PBGC combo designs hold DC employer contributions at 6% of pay.

Employer DC contributions include matching, safe harbor nonelective, and profit sharing contributions; however, elective deferrals are excluded.

Recent Legislative and Regulatory Developments
Under the SECURE Act, a new plan, including a CB plan, may be adopted after the taxable year closes, through the employer’s return due date including extensions, and be effective for the prior year. This does not extend the minimum funding deadline, and a 401(k) deferral feature generally cannot be added retroactively.

For plan years beginning after December 31, 2023, SECURE 2.0 permits a discretionary amendment increasing prior-year benefit accruals through the employer’s return due date; it does not apply to increased matching contributions or reduced accruals.

Under SECURE 2.0 Section 348, CB plans with variable interest crediting rates may now use a reasonable projection of the interest crediting rate, not to exceed 6%, when testing compliance with the anti-backloading rules of IRC Section 411(b). This makes it easier for market-rate plans to offer age- or service-graded pay credits without a fixed minimum interest credit. IRS Notice 2024-2 provides anti-cutback relief for certain amendments that eliminate a minimum interest crediting rate, though the accumulated benefit through the end of the interest crediting period containing the later of the amendment’s adoption or effective date must be preserved.

Planning Takeaways
A cash balance plan is one of the few remaining strategies that can generate six-figure deductions for a profitable closely held business, but the design, funding, and testing details determine whether it delivers. Coverage, nondiscrimination, and minimum participation rules may require meaningful benefits for non-owner employees, so the associated benefit costs should be included in the illustration. If a client wants to implement a cash balance plan, CPAs should work together with the client’s TPA, enrolled actuary, and ERISA counsel to run illustrations, confirm deadlines, and settle on a design that fits both the client’s tax picture and the employee census.

 

Jesse St. Cyr, Partner, Poyner Spruill

Jesse is a member of the Employee Benefits and Executive Compensation team at Poyner Spruill LLP. He represents clients before the IRS and DOL in matters involving employee benefits. Jesse has experience working with a diverse range of benefits and compensation matters and has extensive experience working with a variety of employers. Jesse is recognized by Chambers USA as a leading lawyer for Business (Employee Benefits & Executive Compensation).