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

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.

2023 IRS Limit	2022 IRS Limit
Employee Compensation = $330,000	Employee Compensation = $305,000
Solo Plan = $265,000	Solo Plan = $245,000
Key Employee = $215,000	Key Employee = $200,000
Max Contribution = $329,000	Max Contribution = $484,000

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

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.

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.

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.

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
Age	Max %	415 Limit	Max Cont		Age	Max %	415 Limit	Max Cont	415 with 10 YOP
22	37%	41,268	91,236		22	29%	47,043	75,660	0
23	39%	43,351	94,325		23	30%	49,417	78,540	0
24	40%	45,540	97,522		24	31%	51,913	81,532	0
25	41%	47,840	100,828		25	32%	54,537	84,642	0
26	43%	50,257	104,247		26	33%	57,293	87,870	0
27	44%	52,797	107,784		27	34%	60,189	91,221	0
28	45%	55,467	111,445		28	36%	63,223	94,702	0
29	47%	58,273	115,232		29	37%	66,433	98,320	0
30	49%	61,220	119,145		30	39%	69,795	102,076	0
31	50%	64,318	123,196		31	40%	73,328	105,976	0
32	52%	67,574	127,386		32	42%	77,041	110,028	770,410
33	54%	70,998	131,725		33	43%	80,944	114,236	809,440
34	56%	74,595	136,210		34	45%	85,046	118,608	850,460
35	57%	78,374	140,848		35	46%	89,358	123,150	893,580
36	59%	82,347	145,649		36	48%	93,889	127,867	938,890
37	61%	86,523	150,615		37	50%	98,652	132,767	986,520
38	64%	90,915	155,759		38	52%	103,659	137,858	1,036,590
39	66%	95,528	161,074		39	54%	108,921	143,145	1,089,210
40	68%	100,379	166,578		40	56%	114,454	148,640	1,144,540
41	70%	105,476	172,270		41	58%	120,270	154,349	1,202,700
42	73%	110,836	178,162		42	60%	126,383	160,279	1,263,830
43	75%	116,471	184,260		43	68%	132,808	179,111	1,328,080
44	78%	122,392	192,245		44	70%	139,565	185,285	1,395,650
45	82%	128,620	200,409		45	72%	146,666	191,670	1,466,660
46	85%	135,164	208,742		46	75%	154,131	198,280	1,541,310
47	89%	142,046	217,259		47	77%	161,982	205,125	1,619,820
48	92%	149,279	225,951		48	80%	170,234	212,208	1,702,340
49	96%	156,885	234,832		49	83%	178,910	219,539	1,789,100
50	100%	164,880	243,897		50	86%	188,030	228,241	1,880,300
51	103%	173,287	253,157		51	90%	197,621	239,114	1,976,210
52	107%	182,126	262,608		52	95%	207,702	250,494	2,077,020
53	111%	191,418	272,256		53	99%	218,303	262,413	2,183,030
54	115%	201,187	282,104		54	104%	229,447	274,894	2,294,470
55	119%	211,458	292,155		55	109%	241,165	287,973	2,411,650
56	123%	222,257	302,408		56	114%	253,484	301,673	2,534,840
57	128%	233,612	312,876		57	119%	266,437	316,026	2,664,370
58	132%	245,551	323,552		58	123%	280,057	325,220	2,800,570
59	137%	258,102	335,976		59	120%	294,375	317,119	2,943,750
60	142%	271,299	348,287		60	124%	309,430	329,448	3,094,300
61	146%	285,175	357,231		61	122%	325,261	323,686	3,252,610
62	142%	299,765	347,954		62	120%	341,904	317,047	3,419,040
63	138%	315,104	338,558		63	117%	335,180	310,234	3,351,800
64	144%	308,856	353,936		64	114%	328,305	303,244	3,283,050
65	151%	302,468	369,976		65	112%	321,250	296,085	3,212,500
66	151%	295,913	370,060		66	109%	314,012	288,729	3,140,120
67	158%	311,069	387,204		67	106%	306,599	281,172	3,065,990
68	165%	327,005	405,105		68	103%	298,982	273,418	2,989,820
69	173%	343,762	423,792		69	100%	291,156	265,467	2,911,560
70	181%	361,381	443,291		70	97%	283,127	257,330	2,831,270
71	189%	379,905	463,630		71	94%	274,894	249,021	2,748,940
72	198%	399,381	484,841		72	91%	266,468	240,555	2,664,680
73	194%	419,857	475,622		73	88%	257,864	231,951	2,578,640
74	186%	441,386	454,608		74	84%	249,097	223,231	2,490,970
75	177%	433,640	433,640		75	81%	240,188	214,416	2,401,880

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.

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.

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 contributions	More costly to administer
Contributions over $100k	Permanent plan design
Custom design structure	Mandatory contribution levels
Contribution range	No 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.

The maximum solo benefit payout at retirement is the following:

Year	Amount
2023	$265,000
2022	$245,000
2021	$230,000
2020	$230,000
2019	$225,000

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.

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.

Due to the nature of the plan, the calculation works out to the lifetime limit of $3.4 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.

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.

Is there an age limit for cash balance plans?

While a cash balance plan can allow participants of any age, most plans have an eligibility age requirement of 21 and older. In addition, most plan documents use an eligibility entry date of one year for new employees (with an entry date of January 1st or July 1st).

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.