Cash Balance Plan Contribution Limit for 2023 [Age + IRS Maximum]


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We all know that cash balance plans are one of the best retirement strategies on the market. But most people don’t really understand the cash balance plan contribution limits by age or the IRS maximum benefit.

People get confused when it comes to minimum and maximum contributions. They also look for clarification on annual and lifetime limits.

The IRS limit for a cash balance plan is currently $3.4 million. For a self-employed person who wants to fund the maximum annual amount, contributions to the plan are usually in the range of $100,000 – $350,000 annually. This depends on the business owner’s compensation and age.

In this post, we will answer many of these funding questions. Let’s dive in and look at some basic funding and IRS guidelines.

Cash Balance Plan Contribution Limit

What is the IRS limit for a cash balance plan?

Cash balance plans are a type of defined benefit plan. But they have a few differences compared to a traditional defined benefit structure.

For a self-employed business owner who wants to contribute the maximum lifetime limit to a cash balance plan, the owner’s annual tax-deductible contributions to the plan will generally range from $100,000 to $300,000 annually (depending on income and the owner’s age). The annual contribution is generally not fixed and will go up or down depending on a variety of criteria.

The goal is to generate a certain benefit at retirement age. Essentially a cash balance plan is aiming for a retirement amount down the road.

This is in contrast to how a 401(k) works. A 401(k) plan establishes the maximum contribution upfront. They both are retirement savings vehicles. They just go about it a little differently.

Once money is contributed to a 401(k) plan, the account balance could grow to millions of dollars or in theory it could go to zero! For plan compliance purposes, it doesn’t really matter.

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A cash balance plan doesn’t really have an annual contribution limit like a 401(k). This is because it is trying to reach a specific amount upon retirement (typically at 62 years old).

The amount of money in the plan at retirement is dependent on certain things. But mostly it depends on your average compensation. Assuming maximum compensation, you can have about $3.4 million upon retirement. A nice chunk of money.

As an example, the maximum annual contribution for a 401(k) plan is $61,000 ($67,500 for age 50+) for 2023. However, the maximum cash balance plan contribution is as high as $420,000.

Are the contributions age-weighted?

But the nice part about the plans is that you can contribute more as you get older. So annual contributions will increase with age and higher compensation.

Here’s a closer look at how it works…

Let’s assume for example that there are two hypothetical employees who each make $40,000 annually. One of the employees is age 36 and the other is age 56. In theory, they would both have the same retirement balance at 62 years old.

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But the 36 year old has many more years until retirement, as compared to the 56 year old. As such, the company would have to contribute a smaller annual amount.

However, the 56-year-old is just 6 years away from retirement age. Accordingly, the company has to make larger contributions to reach the same retirement goal.

This is why the plans can work so well. Most business owners tend to have higher income the older they get. Combine this with the age weighting of the plans and you get the point. Large tax deductible contributions above $100,000 are the norm.

Is there an age limit for cash balance plans? A plan can restrict employees under the age of 21 and can have a one year waiting period for new employees (with the plan entry being January 1st or July 1st).

What is the lifetime limit?

Even though cash balance plans may have minimum contributions and maximum contributions, they also have a lifetime limit or a lifetime cap as it is sometimes called.

We actually established what this lifetime limit is in the previous section. It is $3.4 million for 2023. This is up a little from 2022 as it actually changes annually. It is indexed based on mortality rates, etc.

Many employers aren’t really concerned about the lifetime limit because they simply want to maximize contributions. The goal is huge tax deductions and to supercharge retirement savings.

IRS limit for cash balance plan (annual contribution limits)

One question we are asked all the time is: what is the most I can contribute to a cash balance plan? What is the IRS limit?

This question can sometimes get the generic response: it depends. But we can give you a good idea how much if you want to push the annual contribution limits.

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There is technically no annual contribution limit for a cash balance plan. Instead, the ultimate benefit to be paid at retirement is limited.

So if we assume maximum compensation, published mortality rates and an interest rate credit of 5% (pretty standard), we can actually come up with an approximate annual contribution limit for a given age.

But be careful. These IRS contribution levels are used for illustration purposes and actual amounts are calculated by an actuary. The IRS limit will also be indexed usually on an annual basis.

However, if you are looking for a general guideline this should do. We will discuss in a bit how to increase these numbers if you are really looking to make a large contribution. But this is a good starting point.

Maximum Annual Contribution Table – 2023

   Cash Balance Plan Cheat Sheet      
  2022    2023  
2022 Amounts, NRA = 62+3    2023 Amounts, NRA = 62+3    
Comp assumes  245,000  Comp assumes 265,000  
          
AgeMax %415 LimitMax Cont AgeMax %415 LimitMax Cont415 with 10 YOP
2237% 41,268 91,236 2229%47,04375,6600
2339% 43,351 94,325 2330%49,41778,5400
2440% 45,540 97,522 2431%51,91381,5320
2541% 47,840 100,828 2532%54,53784,6420
2643% 50,257 104,247 2633%57,29387,8700
2744% 52,797 107,784 2734%60,18991,2210
2845% 55,467 111,445 2836%63,22394,7020
2947% 58,273 115,232 2937%66,43398,3200
3049% 61,220 119,145 3039%69,795102,0760
3150% 64,318 123,196 3140%73,328105,9760
3252% 67,574 127,386 3242%77,041110,028770,410
3354% 70,998 131,725 3343%80,944114,236809,440
3456% 74,595 136,210 3445%85,046118,608850,460
3557% 78,374 140,848 3546%89,358123,150893,580
3659% 82,347 145,649 3648%93,889127,867938,890
3761% 86,523 150,615 3750%98,652132,767986,520
3864% 90,915 155,759 3852%103,659137,8581,036,590
3966% 95,528 161,074 3954%108,921143,1451,089,210
4068% 100,379 166,578 4056%114,454148,6401,144,540
4170% 105,476 172,270 4158%120,270154,3491,202,700
4273% 110,836 178,162 4260%126,383160,2791,263,830
4375% 116,471 184,260 4368%132,808179,1111,328,080
4478% 122,392 192,245 4470%139,565185,2851,395,650
4582% 128,620 200,409 4572%146,666191,6701,466,660
4685% 135,164 208,742 4675%154,131198,2801,541,310
4789% 142,046 217,259 4777%161,982205,1251,619,820
4892% 149,279 225,951 4880%170,234212,2081,702,340
4996% 156,885 234,832 4983%178,910219,5391,789,100
50100% 164,880 243,897 5086%188,030228,2411,880,300
51103% 173,287 253,157 5190%197,621239,1141,976,210
52107% 182,126 262,608 5295%207,702250,4942,077,020
53111% 191,418 272,256 5399%218,303262,4132,183,030
54115% 201,187 282,104 54104%229,447274,8942,294,470
55119% 211,458 292,155 55109%241,165287,9732,411,650
56123% 222,257 302,408 56114%253,484301,6732,534,840
57128% 233,612 312,876 57119%266,437316,0262,664,370
58132% 245,551 323,552 58123%280,057325,2202,800,570
59137% 258,102 335,976 59120%294,375317,1192,943,750
60142% 271,299 348,287 60124%309,430329,4483,094,300
61146% 285,175 357,231 61122%325,261323,6863,252,610
62142% 299,765 347,954 62120%341,904317,0473,419,040
63138% 315,104 338,558 63117%335,180310,2343,351,800
64144% 308,856 353,936 64114%328,305303,2443,283,050
65151% 302,468 369,976 65112%321,250296,0853,212,500
66151% 295,913 370,060 66109%314,012288,7293,140,120
67158% 311,069 387,204 67106%306,599281,1723,065,990
68165% 327,005 405,105 68103%298,982273,4182,989,820
69173% 343,762 423,792 69100%291,156265,4672,911,560
70181% 361,381 443,291 7097%283,127257,3302,831,270
71189% 379,905 463,630 7194%274,894249,0212,748,940
72198% 399,381 484,841 7291%266,468240,5552,664,680
73194% 419,857 475,622 7388%257,864231,9512,578,640
74186% 441,386 454,608 7484%249,097223,2312,490,970
75177% 433,640 433,640 7581%240,188214,4162,401,880

The above table is for 2022 and 2023. The amounts would be different for 2021. But let’s take a closer look at the numbers.

For 2023, an employee with 10 years of participation in a cash balance plan can receive a maximum annual IRS benefit payout of $265,000 per year beginning at the age of 62. As previously discussed, the IRS places a limit on compensation used in the calculation of benefits. For 2023, the maximum (which is indexed to the CPI) was $330,000 and for 2022 it was $25,000 lower.

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Alternatively, they could receive an equivalent lump sum of approximately $3.4 million. The benefit limit applies to single-life annuities that will begin between the ages of 62 and 65, with an adjustment made to reflect the starting age and form of payment.

How much can you contribute to a cash balance plan?

The employer is also vested with the responsibility to invest plan assets for the employees.  If the investment doesn’t give the required returns, the employer will be forced to make unanticipated contributions. To avoid this situation, the employer has to make three key investment decisions;

  • Asset allocation – this has a huge impact on the returns from an investment as compared to interest crediting rate
  • Interest crediting rate – if the rate is high, the plan will have more growth to benefit the participants but may have bigger shortfalls when the target is not achieved.
  • Handling shortfalls – if an investment does not give the expected returns, 401(k) and profit sharing contributions can be paused for a year or two to free up funds to finance cash balance plan contributions. Amortization period could also be extended up to a maximum of seven years.

What is the maximum contribution to a cash balance plan?

So we discussed before the annual contribution limits. But that didn’t really tell the whole story. There are ways to get the funding above these levels. But it takes a little planning and quality plan structuring.

The limits are much higher than a 401(k) plan. For 2023, the maximum annual contribution to a 401(k) plan is $61,000 ($67,500 people aged 50 and older), while the maximum cash balance plan contribution can reach as high as $341,000.

So I would start with the numbers above and then consider what we would call “prior service” or “past service.” This is a creative strategy to maximize the contribution in a given year.

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This only works for a new plan and not the conversion of a plan. It allows the business owner to grant an opening cash balance credit to all eligible employees. This allows you to get more into the plan in year one only.

The credit for past service can be a little complex, but let’s just say that the main requirement is that there was compensation in prior years. For illustrative purposes, you could assume that you could get an opening credit of approximately 50% of the contribution listed in the table above. There are a few other tips and tricks, but let’s just assume that will get you to the cash balance plan maximum contribution.

What is the Minimum Contribution?

I stated before that the #1 question we are asked is typically what the maximum contribution can be. But I think the #2 question we are asked is: what is the minimum cash balance plan contribution?

Why is this? Well, most clients are hoping for the best, but also considering any downside. Folks don’t want to be “stuck” in a plan that they are unable to fund. That’s why minimum contributions are often discussed.

But it is usually less of a concern than it should be. In fact, after the first year your plan will generally have a funding range. This would include a low end and high end. So you could simply choose the low end of the range.

In fact, if you have made substantial contributions and your plan has been in place for a few years you may find that you have no minimum funding amount. This is certainly not always the case. But if you think that funding might be an issue, make sure to communicate your concerns with your plan administrator.

Cash balance plan requires optimum investments to benefit participants. These investment goals and strategies should be analyzed and changed at least annually to accommodate any shortfalls.

Plan sponsors should avoid unanticipated contributions towards a plan by doing thorough research before making key decisions on asset allocation, interest crediting rate and handling shortfalls.

CB Pros ✅CB Cons ❌
Tax advantaged contributionsMore costly to administer
Contributions over $100kPermanent plan design
Custom design structureMandatory contribution levels
Contribution rangeNo employee deferral option

Cash Balance Plan Maximum Benefit

People sometimes get confused between the maximum benefit and the contribution limits. Remember that there are contribution limits by age and compensation. These contributions and asset returns will result in your balance at retirement. But then you have to determine your cash balance plan maximum benefit at retirement.

The current maximum cash balance plan at retirement is $3.4 million. But this is indexed annually for inflation by the IRS.

Essentially here is how it works. The IRS establishes the annual maximum payout that will begin at your normal retirement age. This can be age 62 or 65, but is usually calculated based on age 62.

Then you would consider mortality tables. As a general rule, people are living longer. But in the last couple of years, the average lifespan has decreased slightly, thanks to various factors.

The cash balance plan maximum benefit is then calculated by taking the annual maximum payment at retirement and extending it out over the average lifespan. It is then discounted back, using an interest rate, to the present value at the retirement age of, for example, 62. This is essentially how the $3.4 million is calculated.

The IRS does not directly calculate the $3.4 million limit maximum benefit. However, the IRS does control the current annual payment stream, which is $265,000. As this number goes up, the maximum benefit will then increase accordingly.

Cash Balance Plan Limits: Funding Calculation

The actual funding calculation can be a little challenging. Benefits received are based on the total years of service coupled with the salary for the past few years leading to retirement. An annual credit based on the salary is made to your account, normally 5% and then an interest rate credit is added to your account balance.

self employed

The contributions made to a cash balance plan are based on the required amount needed to provide benefits to participants. The amounts are calculated based on actuarial assumptions.

However, any annual benefit for a participant cannot exceed the lower of:

  1. 100% of the plan participant’s average compensation for the highest 3 consecutive calendar years; or
  2. $265,000 for calendar year 2023

The IRS establishes annual compensation limits. An employee’s W-2 can be higher than the $330,000 limitation, but the plan actuary can only use this amount for contribution purposes. Compensation will ultimately determine any accumulated retirement plan benefit during retirement.

Lifetime Contribution Limits

The cash balance plan lifetime limit is significantly higher than a 401(k) plan. The difference grows even higher as age also increases. This enables employees to build substantial tax-deferred accounts. Cash balance plans require individuals who earn well, like key employees in medical, law, and accounting practices to take advantage of the contributions and secure retirement portfolios quickly.

Cash Balance Plan Contribution Limit

Due to the nature of the plan, the calculation works out to the lifetime limit of $3.1 million at age 62. The specific calculation will discount this $3.4 million amount based on the employee age and using an assumed interest rate over a 10-year period.

What is the most I can contribute to a cash balance plan? Contributions toward a cash balance plan can be as high as $400,000 as the participant nears retirement age, subject to their level of income.

How to determine estimated contribution limits:

  • Age 40 = $148,640

    While our average client is in their early 50’s, at age 40 clients usually start getting interested about saving for retirement. In addition, at this age income will usually start to increase and so will tax liabilities.

  • Age 50 = $228,240

    In the early 50’s many will begin to ramp up retirement contributions. Clients often realize that a 401k just won’t get an reasonable amount into savings.

  • Age 60 = $329,430

    At this age retirement is just around the corner. Maximum funding is usually recommended in order to save on taxes and make sure there is adequate savings.

  • Determine funding range

    Even though the amounts above represent funding limits, you will generally have a minimum and maximum amount. Determine which level makes sense for you depending on taxable income and marginal federal and state tax rates.

  • Examine investment balances

    Once the contribution is made make sure to monitor the investment returns in order to gauge future funding. High returns will equate to lower future contributions and lower returns will push contributions towards the maximum. Compare this to the cash balance plan maximum benefit.

As a result of the higher limits, a business owner can use higher earning years that will help them catch up on retirement contributions and maximize the tax deduction.

Final thoughts

A cash balance pension plan is actually a type of defined benefit plan. This is because the accrued benefit is not solely determined based on the asset value in the specific employee-allocated account. Company contributions are calculated using actuarial assumptions.

Each year interest is credited to the cash balance pension plan accounts. The rate of interest credited can vary from year to year, but the method for determining it must be specified in the plan document so that it is not subject to plan sponsor discretion.

The rate of interest credited can be either a fixed rate or a rate related to some index or other independent source, such as the consumer price index or the one-year Treasury bill rate. The interest rate may be tied to the actual investment performance of the plan’s assets in certain situations, although this can create volatile results in nondiscrimination testing from year to year and volatile contribution requirements from year to year.

Paul Sundin

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10 thoughts on “Cash Balance Plan Contribution Limit for 2023 [Age + IRS Maximum]”

    • Hi James – Based on your age, you can get around $315,000 into a plan. You also could possibly combine with a 401k and also do a prior service adjustment to get in $400,000 plus. I will reach out to you and we can discuss some strategies we use to maximize plan contributions.

      Reply
  1. Is there a minimum amount I need to contribute each year? My business has some fluctuations, so I am not sure that it makes sense for me to set up one of these plans.

    Reply
    • Hi Lalith – There really is not a minimum amount you need to contribute each year. It will vary based on a few variables like investment performance and compensation. When we calculate the annual contribution, you will get a funding range. There is a targeted amount, but also a minimum and maximum contribution. For example, let’s say you had a target funding of $120,000. But your range might be $60,000 on the low end with a maximum of $175,000. This gives you some flexibility to contribute a larger amount in a good year and provide you some cushion on the downside in case your year was not that great. We can also provide you with an illustration that can give you an idea of contribution levels.

      Reply
  2. I will be retiring next month and was never informed of cash balance plans. I am the owner and sole employee of a company. Is it still possible and/or does it make sense for me to do this for one year? I’ve maxed out my 401K and IRA for this year. Thanks

    Reply
    • Hi Roy – it may not be worth it for one year. But if you are thinking about keeping your plan open for a few years, you may have some options. If you want to explore them just send us a note on our contact form and we can discuss.

      Reply
  3. Hi Paul,
    I am 77 years old and I have been contributing for 12 years from the age of 65. I am still employed. What is the maximum I can contribute? They inform me that I cannot contribute and that I have over contributed.

    Reply
    • Hi Sam – Considering your age and the fact that you have been funding for 12 years, it does not surprise me that you are overfunded. This can be a difficult situation. The reason why overfunding can be such a problem is because when the plan is terminated, the overfunded portion is taxed along with an excise tax. This problem is called reversion. I would take a look at an article I wrote on the issue and see if you can get the plan back in line. https://emparion.com/10-effective-strategies-for-overfunded-defined-benefit-plans/

      Reply
  4. My salary is over the IRS compensation limit ($290k for 2021). My prospective employer contributes 6% of my salary to a cash balance plan (I am not required to contribute). Is the employer’s 6% contribution subject to the IRS compensation limit? That is, is the 6% contribution based on my actual salary or the IRS compensation limit of $290k? Thanks.

    Reply
    • Hi Joe – the plan likely caps the 6% on the $290k wage cap. However, cash balance plans do allow companies to segregate employees into different groups and make higher contributions to certain groups. So it just depends on how the plan is structured. If you reach out to your HR dept they should be able to clarify.

      Reply

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