Defined Benefit and Cash Balance Plans

Everything above is a defined contribution plan, and all of them stop at the IRC §415(c) ceiling of $72,000. For an owner with high, stable profit and a compressed number of working years left, the defined benefit plan — almost always structured today as a cash balance plan — is the only vehicle in the Code that goes materially higher.

Why the limit rises with age. A defined benefit plan promises a retirement benefit, and IRC §415(b) caps that promise at $290,000 a year in 2026. The contribution is then whatever an actuary certifies is required to fund that promise over your remaining years to retirement. Fund a $290,000 annuity over thirty years and the annual number is modest; fund the same annuity over eight years and it is enormous. The deferral capacity therefore scales with age, roughly:

These are illustrative — your actuary’s number depends on compensation history, the plan’s interest crediting rate, and the assumed retirement age — but the shape is the point. This is the one tax-advantaged vehicle that rewards having started late.

The combo, and the 6% trap that governs it. A cash balance plan is normally paired with a 401(k) profit-sharing plan so the owner captures both the elective deferral and the actuarial contribution. Coordinating them is where the technical work lives. IRC §404(a)(7) imposes a combined deduction limit when a defined benefit and a defined contribution plan cover overlapping employees — and two exceptions dominate practice:

• If employer contributions to the DC plan (elective deferrals do not count) stay at or below 6% of covered compensation, §404(a)(7) does not apply at all.
• If the DB plan is covered by the PBGC, §404(a)(7) does not apply either, and the DC plan gets its full 25%.

Here is the trap. PBGC coverage excludes plans that benefit only substantial owners — so the owner-only cash balance plan, the exact case most readers of this section are contemplating, is not PBGC-covered, and the second exception is unavailable. That leaves the 6% limb: profit sharing must be held to 6% of compensation, not the 25% an unconstrained plan would allow. Design the combo around that number from the start. A practitioner who maximizes the profit-sharing contribution first and adds the cash balance plan afterwards has usually built something that does not deduct.

What it costs and what it commits you to. An actuary must certify funding and sign Schedule SB every year, Form 5500 is mandatory from the first year regardless of asset size, and setup plus annual administration typically runs $2,000–$5,000 for an owner-only plan and more with staff. The contribution is not discretionary: it is a funding obligation with a legally required range, and a year of poor profit does not excuse it. Underfund and you owe excise tax; overfund and a reversion on termination is taxed punitively. Treat a cash balance plan as a five-to-ten-year commitment, size the promised benefit to the trough of your expected income rather than the peak, and pair the actuary with a TPA who runs these routinely. Done well it is the largest legal deferral available to an individual taxpayer; done casually it is an annual liability you cannot switch off.