For owners of profitable practices, a 401(k) with profit sharing tops out at $72,000 a year plus catch-up contributions. A cash balance plan layered on top can add hundreds of thousands of dollars in deductible contributions, although the combined deduction limit discussed below often trims the employer side of the 401(k).
What a cash balance plan is
A cash balance plan is a defined benefit pension plan expressed as a hypothetical account. Every year, each participant receives a pay credit, for example a set dollar amount or a percentage of pay, and an interest credit, often at a fixed rate such as 4% or 5%. An actuary certifies the required contribution range.
The IRS limit applies to the benefit at retirement, which for 2026 is $290,000 a year, translated into a lump sum. Older owners can therefore accumulate more each year to reach the cap. That limit phases in over the first 10 years of plan participation and can't exceed average pay for the highest three years, a point that matters for owners who start a plan in their late 50s or 60s.
If your practice is profitable and the owners are 45 or older, Summer Associates can plan the tax side of a cash balance plan with your actuary and TPA.The first consultation is free, with no obligation.
Book a free consultationApproximate annual contribution ranges
| Owner age | Illustrative cash balance contribution | Plus 401(k) + profit sharing |
|---|---|---|
| 40 | $90,000–$125,000 | Up to $72,000 |
| 50 | $150,000–$205,000 | Up to $80,000 with catch-up |
| 60 | $250,000–$335,000 | Up to $83,250 at ages 60–63 |
These ranges are illustrations, not limits. Actual figures depend on the plan's interest rate, prior service, and compensation, which is capped at $360,000 for plan formulas.
If the cash balance plan is exempt from PBGC coverage, as is common for professional practices with 25 or fewer participants, employer 401(k) contributions above 6% of total participant pay count toward a combined deduction limit and generally can't be deducted that year. Many designs therefore give owners the $24,500 deferral and any catch-up, plus a 6% employer contribution (about $46,100 at $360,000 of pay), rather than the full 401(k) column. Starting in 2026, catch-ups by employees whose prior-year wages from the practice topped $150,000, including S corp and professional corporation owner-employees, must be made as Roth contributions, so they aren't deductible. Partners have no W-2 wages and aren't affected.
Key numbers: DB annual benefit limit $290,000 · DC limit $72,000 · compensation limit $360,000 · HCE threshold $160,000.
What staff receive
The combined plan must pass nondiscrimination testing. Practices typically give staff a total of about 5% to 7.5% of pay, counting the safe harbor 401(k) contribution plus profit sharing or a small cash balance credit. When owners' cash balance credits are large, the minimum allocation gateway in the regulations generally requires the full 7.5%. Separately, the cash balance plan must benefit at least 40% of employees or 50 employees, whichever is fewer (but never fewer than two). As a result, some staff usually receive cash balance credits. Staff costs usually run 7% to 15% of the total contribution, which is the trade-off for the owner deduction.
A worked example
Consider a two-physician practice with eight staff and $520,000 of total staff payroll. Dr. A is 56 with $500,000 of compensation, and Dr. B is 47 with $400,000. With 10 participants, the cash balance plan is exempt from PBGC coverage, so the design holds employer 401(k) contributions to 6% of pay to stay within the combined deduction limit. Dr. A receives about $230,000 of cash balance credit, and Dr. B about $140,000. Each also defers $24,500 and receives a 6% safe harbor and profit-sharing contribution of $21,600. Staff receive 7.5% of pay, about $39,000 in total, split between the 401(k) and small cash balance credits. Altogether, about $501,000 comes off the owners' taxable income, including the staff cost, which is deductible. At a 45% combined marginal rate, that saves about $225,000 in current tax, and staff receive about 8% of the total.
Commitments and risks
- A cash balance plan is meant to be permanent. Plan to keep it at least five years, because ending a plan within a few years without a business reason can call its tax-qualified status into question.
- Contributions are required within a range, and the minimum is due 8½ months after the plan year ends (Sept 15 for a calendar year), so they're less flexible than profit sharing.
- Investment returns above or below the interest credit create surpluses or shortfalls that change future contributions. Conservative investment mixes are common.
- Annual actuarial, Form 5500, and possible PBGC costs apply, although many professional service plans with 25 or fewer participants are exempt from PBGC coverage.
Common mistakes
- Choosing an aggressive investment mix that creates large underfunding.
- Ignoring the plan's effect on the SSTB QBI threshold, which is often a benefit, not a cost.
- Not coordinating the partnership agreement's definitions of partner compensation with the plan document.
How Summer Associates helps
Summer Associates' professional practices team coordinates illustrations with your actuary, models the after-tax benefit for each owner, and handles the deduction and funding timing on the practice return.
Sources
This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.