Defined Benefit Plans

Retirement Plan Restatements: Everything You Need to Know

If you’re a business owner with an active retirement plan, whether it be a defined benefit/cash balance plan or 401(K), it’s important to be aware of required plan restatements. You can voluntarily restate your plan at any time if you want to make changes. However, there are times when restatements are required by the IRS.

What is a plan restatement and when are they required?

Retirement plans must follow a set of rules and regulations set forth by the IRS, and when these change, the plan documents must be amended based on those changes. The IRS requires pre-approved, company-sponsored plans to be restated approximately every 6 years. The Pension Protection Act (PPA), which was passed by Congress in 2006, set forth these rules. We are currently in Cycle 3, also known as Post PPA.

During the restatement process, TPA’s such as Emparion will update the plan documents and have the trustees resign these documents. These document updates might also include any amendments or changes that have been made since the original plan documents were created.

What is Cycle 3?

Cycle 3 is the name for the current restatement period for defined contribution (DC) plans. It’s named Cycle 3 because it is the third restatement that has been required by the IRS since the 6-year cycle period begun. The Cycle 1 deadline for DC plans was 04/30/2010 and the Cycle 2 deadline was 04/30/2016.

Is the Cycle 3 restatement mandatory? When is the deadline?

IRS restatements are mandatory for any pre-approved documents and must be completed by a specific deadline. The current Cycle 3 Plan Restatement deadline is July 31, 2022.

What happens if my plan documents aren’t restated by the deadline?

If your plan documents are not restated by the deadline, your plan may fall out of compliance. This could potentially lead to IRS-imposed penalties, such as paying taxes on your investment account balance.

What is a pre-approved plan? Do I have one?

A pre-approved plan is a document that has already been reviewed and accepted by the IRS. If your plan is pre-approved, you should have been issued an IRS letter along with your plan documents when your plan was first established. All plans set up by Emparion are pre-approved.

What is the cost of a plan restatement?

We charge a small fee based on plan specifics. We will let you know the price of your restatement beforehand.

What documents are included in the restatement?

The following documents will be restated:

  • Adoption Agreement
  • Basic Plan Document
  • Summary Plan Description
  • Plan Highlights
  • Updated IRS Pre-Approval Letter

What do I need to do?

Emparion will handle the restatement process. We will provide you with the amended documents electronically as well as a link to e-sign. All you will need to do is review and sign to implement the new documents.

I’m planning on terminating my plan. Do I still need to have it restated?

Prior to terminating, your plan must be consistent with the current IRS regulations. Any amendments will need to be made before your plan can be terminated. Therefore, you will still need to restate your plan unless your plan is currently up-to-date and will be terminated before the restatement deadline.

Defined Benefit Cash Balance Plan: The #1 Structure

We often talk to clients who are searching for retirement structuring. But more often than not, they are interested first in reducing their tax liability. The first option we usually select is a defined benefit cash balance plan.

Retirement advice can be challenging because all clients have unique tax and financial situations.

Retirement planning is not a one size fits all approach. If a doctor is simply an independent contractor or has just a few employees, then there are a couple of perfect structures. It will usually employ a 401k (with profit sharing) in addition to a defined benefit plan.

The majority of our doctor clients will quickly understand how 401k plans work. But a defined benefit plan is a different animal. Let’s take a look at how they work.

Retirement Advice

Defined benefit plans (as well as other types of hybrid defined benefit plans like cash balance plans) are beginning to receive increased attention. Available literature indicates that transition appears to be largely aimed at making employers more attractive to workers who do not plan to remain with the same employer for their entire career.

A defined benefit cash balance plan promises these workers a larger benefit than they would receive under a traditional defined benefit pension plan, as well as a benefit accrual pattern that may be better understood.

Cash balance and other hybrid plans contain features of both defined benefit (DB) and defined contribution (DC) plans. This allows the plan sponsor and participants to take advantage of features of both types of plans (see our dummies post).

Retirement Advice for physicians

One key reason for the growth of cash balance plans was the improved ease of understanding of a participant’s retirement benefit. Another reason was the movement to retirement income based on lump sum values, similar to 401(k) savings plans, and the availability of lump sum payment options.

More recently, small employers have adopted cash balance plans since defined benefit plans may provide higher retirement income than defined contribution plans. A cash balance pension plan is a defined benefit pension plan. Cash balance plans are career average plans in which benefits are accrued incrementally year by year.

Defined Benefit Cash Balance Plan Formula

The benefit is defined by a formula containing a specified pay credit (or allocation) which is placed into a hypothetical account for each participant. A cash balance plan mimics a money purchase pension plan formula; the employer contributes to each participant a percentage of their plan year compensation (as opposed to average annual compensation).  

This allocation is called a “Hypothetical Allocation”. To determine a participant’s accrued benefit at any particular time, the hypothetical account balance is projected, with interest, to normal retirement age. This projected lump sum amount is then converted to an annuity by dividing the amount by the an annuity purchase rate specified under the plan.

Let’s examine some of the advantages of a defined benefit plan:

  • In general, they allow for significantly higher employer contributions than other types of plans. This allows you to take a large tax deduction and funnel substantial funds into the plan. We can assist in the calculation.
  • Significant benefits possible in a relatively short period of time.
  • Can be combined with other retirement plans including a 401k.
  • Can be a business of any size in any industry including solo practitioners.
  • Vesting can be immediate or spread out over a seven-year period.
  • Plan can be used to promote certain business strategies by offering subsidized early retirement benefits.
  • Participant loans are allowed.
  • No set contribution limits. The deduction limit is calculated by an actuary and is any amount up to the plan’s unfunded current liability.
  • Benefits are not dependent on asset returns.

Quality retirement advice for doctors should encompass many factors. But the most important is considering a defined benefit plan. This is often the best strategy of all.

Are you looking to stash more money into retirement? A pension plan may be a great option for you. I will show you how setting up a pension plan might not be as tough as you might think.

While a majority of the business world has moved to defined contribution plans, such as 401Ks, the pension plan or defined benefit plan has many benefits that you may want to consider.

Plan Strategies

How do you set up a pension plan? It’s not as hard as it seems. Check out our simple how-to guide below.

There are a lot of requirements that go along with setting up a pension plan. Let a seasoned financial advisor help you navigate the rules and regulations. The advisor needs information about your employees, their ages, and salaries to calculate the amount you must contribute to the plan based on your chosen percentage and the IRS rules.

Financial planning puzzle piece

Your pension plan document is the governing document that includes all the rules and regulations of the plan. This includes details such as the amount of the contributions (percentages) and interest rates. The plan document must follow all IRS rules but can incorporate its own rules and regulations as well, as long as they are within the law.

Illustrate what the plan looks like to you as this helps keep you accountable. Make sure you have provisions in place should your company face issues and be unable to make contributions.

Your plan or illustration should include plans to amend and freeze the plan, if necessary. It should also include the options and circumstances under which you can terminate the plan and how you’d distribute the assets to participants.

Choose a Third-Party Administrator

Rather than taking on the administrative components of a pension plan, hire a third-party administrator to handle it for you. TPAs work alongside you to help you remain compliant and accurate in your record-keeping and plan contributions/distributions.

A TPA can help you create the plan documents, prepare statements, perform annual reviews, prepare necessary reports for the IRS, calculate contributions, and manage audits.

Make the required contributions

You must make all necessary contributions by the due date of your tax returns, whether you are on a calendar year filing or tax year filing. If you need an extension, aka can’t make your contributions on time, you may request an extension of 8 ½ months. If you’re on the calendar year plan, this means your contributions for the previous year would be due by September 15th.

Plan Structuring

It’s not as difficult as it seems to set up a pension or defined contribution plan and there are many benefits of doing so. If you are looking for ways to entice more talented people to work for your company or you need a tax-friendly way to catch up on your own retirement plans, the pension plan is a great idea.

The key is to have proper help. Don’t try to manage this process alone. While you try to manage and grow your business, you need qualified personnel to help you run your pension plan as there are many laws and regulations you must follow.

If you do, though, you benefit from the tax advantages, the ability to increase your own retirement savings at much higher levels, and the possibility of attracting and keeping great employees.

In summary, setting up a pension plan for your business requires the help of:

  • A financial advisor – This person will help you make decisions right upfront. You’ll choose the right plan, see the pros and cons of other plans, and make contribution decisions. You’ll go over the IRS rules and regulations and decide what steps you should take, including the type of vesting you’ll offer, whether cliff or gradual.
  • third-party administrator – Once you have the plan in place, don’t let the administrative tasks take over your day. Again, focus on your business and growing it as that’s the only way you’ll keep up with your required contributions. Find a TPA that you work well with as you’ll be in constant contact throughout the year.

Setting up a Defined Benefit Cash Balance Plan

Once you have the proper help in place, the rest of the steps are easy for you to manage:

  • Create your documents – You want your documents to be as straightforward and informative as possible. You want your employees to understand the plan and see it as an advantage of working with you. Of course, always have an open door with your employees, allowing them to ask questions of you or the TPA to determine where they stand with their retirement accounts.
  • Be flexible – If things happen down the road (as we all know life is unpredictable), you need plans in place to freeze or terminate your plan. Don’t let your plan become a liability; instead, have plans in place with the help of your support system that allows changes to the plans that will allow your business to stay afloat while keeping you in line with the IRS rules and regulations.

Bottom Line

If you’re interested in setting up a pension plan, start today! The sooner you start the more money you’ll accumulate for yourself and your employees. Setting up a pension plan can be straightforward with the right help and following the IRS guidelines. Get yourself and your employees set up for retirement today.

Selling Your Business: What Do You Do With Your Cash Balance Plan?

Let’s assume that you have a cash balance plan or another defined benefit plan, and you decide to sell your business. What happens next? Does the plan carry on to the new owner, or can you transfer it to a new company you own?

The answer depends on how the business sale is structured and your intensions. This post will discuss how business sales are structured and how these structures impact your retirement plan. Let’s get started!


There are two primary business sale structures:

  1. Asset purchase; or
  2. Stock purchase

There are pros and cons to the above structures. In general, the buyer wants to do an asset purchase, and the seller wants to do a stock sale. These diverging positions can make the negotiation process complex.

While there are many issues when negotiating these deals, it usually comes down to tax implications, current contractual relationships, liability exposure, and the strength of the brand of the existing business.

Asset Sale 

With an asset sale, the buyer is merely acquiring the company’s assets (and possibly the liabilities). They are not buying the company (stock or membership interests). So, in essence, the old company is dissolved or carries on in a limited capacity.

The buyer will usually set up a new company to hold the assets. If the buyer is already in business, they will typically merge the newly acquired assets into their existing business.

In an asset sale, the seller maintains the legal entity. The buyer simply acquires the individual assets, such as computers, fixtures, equipment, licenses, and inventory.

But most importantly, they acquire the goodwill and customer lists. In most service businesses, the value is in intangible items like goodwill and customer lists. 

The significant advantage for the buyer is that with the asset purchase, the assets get a “step-up” in basis. The purchase price is then allocated to the purchased assets.

Equipment, computers, and other tangible assets are depreciated over their useful life, typically 3-7 years. The remaining purchase pricing is usually allocated to goodwill and other intangible assets with a 15-year useful life. As such, the depreciation expense for these items is a great benefit to the buyer. 

In addition to the tax benefits, buyers like asset purchases because they more easily avoid potential liabilities, especially contingent liabilities relating to employees, product liabilities, contractual disputes, and other legal exposures.

However, asset purchases can present problems for buyers. Due to assignability, legal ownership, and third-party consent, contracts can be challenging to transfer. Obtaining consent and transferring contracts can slow the transaction process.

For sellers, asset sales can generate higher taxes. Intangible assets, such as goodwill will be taxed at capital gains rates. However, other tangible or “hard” assets are often subject to higher ordinary income tax rates.

If the selling entity is a C-corporation, the seller faces double taxation. It is taxed upon the initial sale and then again when dividends are transferred to the shareholders.  

Stock Sale

With a stock purchase, the buyer acquired the selling shareholders’ stock or membership interests (for an LLC) directly through a sale. As such, the seller just steps in place of the seller, and the business and legal entity will carry on. Unlike an asset purchase, stock sales do not require numerous separate conveyances of each asset because the title lies within the corporate entity.

Because the buyer is taking the seller’s place, there is no step-up in basis. The seller will pay capital gains on the difference between the sale price and the seller’s basis in the assets.  

The stock purchase agreement can mitigate these liabilities through representations, warranties, and indemnifications.

For example, a company may have government or corporate contracts, copyrights, or patents that could be challenging to assign. A stock sale could be a better solution because the company, not the owner, will retain the ownership. Also, when a company is dependent on a few prominent customers or vendors, the stock sale can reduce the risk of losing these contractual agreements.

Sellers often favor stock sales because all the proceeds are taxed at a lower capital gains rate, and in C-corporations, the corporate level taxes are bypassed. 

Defined benefit plan or cash balance plan

So now, let’s get back to what happens with your defined benefit plan or cash balance plan. As stated above, the company carries on with a stock purchase as it usually would. So there was actually no change to the retirement structure. It would still cover the employees and potentially any compensation for a new owner.

But the existing owner would be terminating their employment with the company and, as such, would roll any vested balance over into their IRA. The seller should make sure that they give the buyer the plan documents and make sure that they still want this plan to carry forward. 

The buyer does not want to continue with a defined benefit plan in many situations. This is often the case if they are a smaller, more non-sophisticated hire who does not understand the complexities of these plans. 

Alternatively, it could also be a large acquirer who already has a different structure in place. This may these employees may be covered under the control group rules. But in either event, make sure discussion of the plan is brought up in the acquisition paperwork.

But under an asset purchase transaction, the plan will still stay with the old company. The old company now would have no assets or possibly limited assets that weren’t part of the sale. The owner might continue to use the corporation for operating another business. 

It is also common for a business acquirer to undertake a consulting agreement with a seller to pay them a certain amount as an independent contractor consultant. This money can then go to the old company still owned by the seller. As such, the seller can continue to use the defined benefit plan as a tax deferral on this additional consulting income.

However, even though the seller might choose to keep the plan for additional operations, they still need to terminate and pay out the employees covered under the defined benefit plan. In most situations, these employees will become immediately vested, and balances can be rolled over into individual IRAs.

As you can see, how a business transaction is structured is critical to determining what happens with the defined benefit plan. Make sure you consider these issues upfront.

Final Thoughts

Generally, more minor business sales are usually structured as asset purchases. The buyer gets the tax advantages and does not assume any liabilities. However, many are structured as stock sales for larger companies with a well-known brand and many existing contracts. 

Each business transaction is unique, and buyers and sellers should consult with their CPA and attorney to ensure the transaction is structured correctly. 

Defined Benefit Retirement Plan [Strategies + IRS Hazards]

We know it is tough to understand how a defined benefit retirement plan works. In this guide, we will show you how they work and point out a few tips along the way.

In a defined contribution plan, the benefit upon termination of employment is the vested percent of the participant’s account balance. The vested percent increases with service, generally reaching 100% by the seventh year.

In a defined benefit pension plan, the account balance is replaced by the concept of an accrued benefit. A participant accrues (or earns) a portion of his projected benefit at retirement each year that he is in the plan.

A joint and survivor annuity pays a monthly amount during the life of the participant and a reduced amount (usually 50%) upon the participant’s death for the remaining life of the spouse. Both the spouse and the participant must consent in writing to waive this form of benefit calculation if the participant wants to take a lump sum or other form of an annuity.

Tax Deductions Available for a Defined Benefit Pension Plan

The private sector enjoys better tax treatment than the public sector because the employer funds most pension plans in the private sector and employees in the public sector.

For a plan to qualify for tax deductions, it must meet the minimum standards set on participation, vesting, and non-discrimination against low-paid employees. These requirements help regulate pension plans. Going against the requirements means the employer’s contribution will be considered a taxable income on the employee to be tax-deductible for the employer.

This article will discuss how contributions, investment income, and benefit payments are treated when it comes to taxation in a defined benefit pension plan.

Defined Benefit Retirement Plan Contributions

Corporate income tax allows employer contributions and wages to be deducted from business expenses. Employer contributions are also not taxed as income to the employees under personal income and Social Security payroll taxation.

But employee contributions are generally taxable for personal income taxation and Social Security payroll tax; contributions by an employee to salary reduction plans are not taxed.

However, limits are set for defined benefit plan contributions to protect the Treasury against excessive tax deductions. Limits are calculated on maximum employee earnings used to determine contributions or benefits.

Investment Returns

Once employers and employees have contributed to a defined benefit plan, they invest assets to grow their funds; earnings from these investments are not taxed. Assets maintained by the plan are also not taxable.

However, in the event of a termination of the defined benefit plan and the employer gains on surplus plan assets, the surplus is subjected to a corporate tax income plus an excise tax at 20%. It may rise to 50% if the employer does not transfer the excess assets to the replacement plan or increase the plan benefits to the participants. Excise tax helps discourage employers from misusing plans and discourage firms from terminating defined benefit plans.

Distribution of Benefits
Benefits from a defined benefit plan are received at retirement or earlier and are subject to federal and state personal income taxation. However, they are exempted from the Social Security payroll tax.

A participant also recovers the amounts that have previously been taxed. Progressivity of the income tax system allows a participant to pay lower taxation in retirement than when continuously taxed on income when working. An excise tax is also incurred when one takes lump-sum benefits before retirement. Excise tax discourages early distribution as pension plans are designed to generate retirement income.

Terminating a plan?

In many situations, business owners are so eager to fund a plan that they don’t realize the permanency of the plans. Defined benefit plans are not elective. So you cannot start and stop the plan as you see fit.

Companies are often hesitant to adopt plans because they are more expensive and complex to understand. Plus, they do require the company to commit to annual funding requirements. This can scare away even the most cash-rich companies. But the tax savings will often outweigh any other downsides.

Sharpened colored pencils

The IRS assumes the plans are permanent and can only be changed or terminated based on particular situations. The main hurdle to closing a plan is demonstrating “business necessity.” The owner cannot simply say that they wish to terminate the plan for no apparent reason. This typically will not go over well with the IRS.

A valid reason would be an unforeseen reduction in profits, a change in ownership structure, or a significant difference in cash flows. On occasion, the IRS has allowed termination due to adopting different retirement plans. A company may be able to demonstrate that a different plan is more suitable for the business.

The IRS also states that a plan should be for a “few years.” But what does this mean, and how is it defined? The IRS will not question a termination that occurs at least ten years after the original plan adoption. Companies that terminate plans in the 5-10 year range have not faced much pushback from the IRS.

How does the calculation work?

Furthermore, the calculation is repeated each year, considering the plan’s past investment experience, assumptions about future participant compensation increases, and assumptions about the plan’s future investment performance.

Contributions to defined benefit plans are required each year and may change yearly. Except for changes in the covered participants, the contribution changes are based principally on how well or how poorly plan assets perform and whether or not the performance meets the growth assumptions underlying the annual actuarial calculation.

The employer assumes the investment risk in a defined benefit plan, and the employer1 generally makes all contributions. The employer is charged with the responsibility to fund the plan adequately, despite the plan’s investment experience.

Financial planning puzzle piece

If the investment returns are good, the required employer contributions will tend to decline. If investment returns are poor, then contributions will increase.

Employers must make the required contributions to adequately fund the required benefit, regardless of the participant’s age at plan entry. A defined benefit plan’s contributions are disproportionately higher for older employees than younger employees.

Because older entrants to the plan normally have fewer years of plan participation before they retire, a larger portion of annual contributions goes towards providing benefits for them. Although younger employees will receive their promised benefit, they are not favored in terms of a defined benefit plan’s allocation of contributions.

Benefit calculation

Benefits under defined benefit plans are often, although not always, stated in terms of a percentage of the participant’s final compensation. In such a case, the higher the level of the participant’s compensation, the greater the plan contribution must be to fund the participant’s retirement income. To illustrate, assume that two employees, age 45, participate in a defined benefit plan promising to pay a retirement income of 60% of their final compensation.

Employee A earns $50,000 annually, and employee B earns $100,000 annually. Without considering their likely compensation growth, if each of these two employees continued to earn the same income until retirement, employee A could look forward to receiving a monthly retirement income of $2,500. ($50,000 X 60% = $30,000 ÷ 12 months = $2,500).

Employee B could expect to receive a monthly retirement income of $5,000 each month. The employer would need to make substantially higher contributions—perhaps double the amount—to fund employee B’s benefit.


A defined benefit pension plan becomes attractive when an employer or employee receives a tax benefit for deferring compensations. Tax deductions should be enjoyed by both the employer and the employee to encourage plan preference.

Constraints to overfunding and an early lump-sum withdrawal should be eliminated to increase the tax advantages under defined benefit plans.

PBGC Coverage Exemption: The Complete Guide

PBGC covers all defined benefit plans. Only those plans meant for substantial owners are exempted from this coverage. Including even one, not notable employee eliminates a plan from qualifying for the exemption.

  • A substantial owner meets the following requirements;
  • 100% ownership of the unincorporated trade or business
  • Direct or indirect ownership of 10% or more of a capital interest in a partnership
  • Direct or indirect ownership of 10% or more of profit interest in a partnership
  • Own 10% or more voting rights of a corporation
  • Own 10% or more of a corporation’s stock value

The ownership attribution rules mainly used to determine controlled groups also apply when ascertaining the stock ownership. Under these rules, stock owned by an owner also belongs to their spouse. Therefore, the owner-only exemption will apply if all participants are substantial owners or their spouses. Children of a significant owner are not attributed to stock ownership. Including them in a benefit plan eliminates the plan from PBGC coverage exemption.

Different plans may also have rules that may change a plan’s reporting or testing requirements but do not specify the PBGC coverage exemption. Some plans are exempted from filing Form 5500 or prefer to file Form 5500-EZ compared to Form 5500-SF or the standard Form 5500. Filing Form 5500-EZ requires that:

  • The plan covers the 100% owner of the unincorporated or incorporated business or only the partners in a partnership.
  • The plan may include the business owner’s spouse or partners’ spouses.
  • No other employee is covered.

Filing Form 5500-EZ does not require ownership of more than 10% of the employer compared to PBGC’s substantial owner exemption. This means that not all eligible plans to file Form 5500-EZ qualify to be exempted from PBGC coverage.

Non-discriminatory testing also considers a 5% ownership of an employer as a Highly Compensated Employee (HCE). PBGC coverage exemption requires a 10% ownership. Therefore, it is not enough for a defined benefit plan covering all HCEs to claim an exemption.

Suppose a PBGC-covered plan terminates without enough assets to distribute to all beneficiaries. In that case, PBGC allows the majority owner to waive a portion of his benefits to be distributed to other participants for their exclusive benefit.

A majority owner, in this case, owns 50% or more of the employer, which is different from the 100% ownership requirement when determining a substantial owner for PBGC coverage exemption.

Cash Balance Plan for Small Business [Top Strategies + Hazards]

When people think of retirement planning, they usually think first of a 401(k) plan or a SEP. These plans can be great options. But have you ever considered a cash balance plan for small business owners?

Most 401(k) plans have contribution limits that fall far short for many business owners. A cash balance plan should be considered because they have contribution limits that can often exceed $300,000 annually.

However, before we look at the details of the cash balance plan, let’s first examine the two main types of retirement structures: cash balance plans and defined contribution plans.

Cash Balance Plan for Small Business

A cash balance plan aims to provide eligible employees with a specified benefit at retirement. The benefit amount is contributed solely by the employer. It’s a specific amount that considers participants’ salaries and ages. Upon the normal retirement age of 62, the employee can take the money out of the plan and pay tax at the employee’s ordinary tax rate or roll the funds into an IRA.

In contrast, defined-contribution plans (such as 401(k) plans) specify a maximum contribution that can be made by the employee (as a deferral) and the employer. In a defined contribution plan, the benefit amount at retirement depends on the cumulative plan contributions and interest income, and investment gains or losses. 

How do cash balance plans work?

The most popular type of cash balance plan is the cash balance plan. Even though it is a cash balance plan, employee contribution amounts and the account balance feel like a 401(k) plan.

The payout is an account balance compared to a monthly income payment presented in a traditional cash balance plan. For this reason, cash balance plans are often referred to as “hybrid” plans. Like 401(k) plans, cash balance plan distributions are taxed at the taxpayer’s ordinary tax rate upon distribution.

However, cash balance plans allow the employee to take a lump sum benefit equal to the vested account balance. If a retiree or terminated employee desires, a distribution can generally be rolled over into an IRA or to another qualified plan.

But the surprising part is that these plans work great for small owner-only businesses and employers with less than 20 employees. They are a little more complex to set up and administer. So careful planning is imperative when setting up a cash balance plan for small business.

Why are cash balance plans so popular?

They allow the business owner to make substantial tax-deferred retirement contributions. Contribution limits are indexed and adjusted annually based on age. But annual contributions can often exceed $300,000, with $150,000 being the approximate average. This compares very favorably to the yearly limitations of a 401(k) plan.

Let’s take a look at an example. Assume a 56-year-old physician makes $500,000 a year and wants to maximize their retirement contribution. Let’s also assume that the physician has no qualifying full-time employees.

chart with finance, tax and debt, Cash Balance Plan for Small Business

Because of age and earnings, this doctor could contribute up to $230,000 to a cash balance plan in the first year. The doctor can make additional contributions if the cash balance plan is combined with a solo 401(k). Not such a bad deal.

These contributions are fully tax-deductible and can be made up to the date the tax return is filed (including tax extensions). The contributions will grow tax-deferred but will be subject to tax at the presumably lower tax rate in retirement.


Due to their low costs and light administrative requirements, defined contribution plans increasingly gain a considerable following. But many organizations still opt to continue providing defined benefit plans. Here are a few things to consider:

Prepare for increased costsCash balance plans have higher fees compared to defined contribution plans. Sponsors should be ready to cover economic costs, benefit costs, administrative fees, Pension Benefit Guaranty Corporation premiums, and investment management expenses.
Plan contributionsSmall businesses should ensure that the business generates enough income to support high contributions under a defined benefit plan. Skipping a contribution increases subsequent contributions and general plan costs.
Plan liabilitiesOpportunities like small-amount bulk-sum sweeps or an ongoing lump-sum offer are effective and cost-efficient ways to help a sponsor reduce liabilities in a cash balance plan.
Investment strategiesA plan investment strategy should align with the plan objectives and acceptable investment returns.
Risk toleranceRisks associated with a plan like equity exposure should be monitored regularly. A limit should be addressed on how much risk a plan can take and an exit strategy if circumstances go out of hand.

Final thoughts

Take a look at the example above. As you will notice, not many retirement structures allow such significant contributions. A 401(k) plan does not even come close.

Cash balance plans are great options for:

  1. Business owners who have consistently high profits.
  2. Professional service companies (physicians, attorneys, consultants, etc.).
  3. Owners who have fallen behind on retirement and are looking to “catch up.”
  4. Owners in high tax brackets looking for tax deferrals. 

If you think a plan may work for you, review your situation with your financial advisor and CPA. Hopefully, a cash balance plan will become a beautiful tool in your retirement arsenal.