Cash Balance Plans: Key Deduction and Funding Considerations for CPAs

If you advise business owner clients, you’re probably comfortable with the contribution and deduction rules that govern 401(k) plans and other defined contribution arrangements. Cash balance plans, however, add a layer of complexity that catches many CPAs off guard.

Because cash balance plans are a type of defined benefit plan, allowable contributions and deductions aren’t just a matter of applying a fixed statutory limit. They’re determined through actuarial calculations, which means an enrolled actuary must calculate the plan’s minimum required and maximum deductible contribution every single year.

Annual contribution requirements can shift based on:

• Participant demographics
• Compensation levels
• Plan design
• Investment performance
• The plan’s overall funded status

Understanding a few key rules can help you better advise clients who sponsor — or are considering — a cash balance plan.

The IRC §404(a)(7) 6% Rule

A common issue comes up when an employer sponsors both a PBGC-exempt cash balance plan and a defined contribution plan, such as a 401(k) profit-sharing plan — a setup often referred to as a combination plan design.

IRC §404(a)(7) imposes a combined deduction limitation on employers maintaining both types of plans at once. The good news: employer contributions to the defined contribution plan that stay at or below 6% of participant compensation generally receive favorable treatment under the rule.

A few important nuances to flag for clients:

• This is primarily a deduction limitation, not a contribution limitation. Contributions above 6% may still be permitted under the plan document — deductibility just has to be evaluated separately.
• Employee elective deferrals are not included in the 6% calculation.
• For sole proprietors, the compensation base is earned income from self-employment rather than W-2 wages. Earned income calculations can be more complex than they first appear, so accurately determining the compensation base is critical to getting the deductible contribution right.

If your client is weighing whether a combination design makes sense, our guide on combination plan design walks through how the pieces fit together, and our article on cash balance plans as tax-savings vehicles digs deeper into the deduction mechanics.

Funding Considerations by Entity Type

Entity structure has a real effect on how cash balance plan contributions are funded and deducted — and it’s a nuance that’s easy to miss.

Corporations and S corporations. Required contributions are generally based on actuarial funding requirements rather than current-year profitability. That means a business may still owe a contribution in a year with little or no income. For clients structured as an S corporation, owner W-2 wages also factor into how contributions and compensation interact — another area worth reviewing with your actuary.

Sole proprietors. Deductible contributions are limited by earned income. If the business generates little or no net income, the deductibility of contributions may be significantly reduced or unavailable — a real problem when a cash balance plan has actuarially determined funding requirements that exceed available earned income. Our entities and allowable compensation resource and our article comparing earned vs. passive income for retirement contributions are useful references when you’re helping a sole proprietor client think this through.

The Importance of Actuarial Coordination

Cash balance plans can require contributions even when business income declines. Investment losses, changes in actuarial assumptions, or existing funding shortfalls can all create minimum funding obligations that must be satisfied to keep the plan in compliance.

Because contribution requirements and deduction limits are both determined actuarially, it’s worth encouraging clients to coordinate with their actuary and third-party administrator well before year-end. Early planning helps:

• Identify funding obligations before they become a surprise
• Maximize available deductions
• Avoid unexpected contribution requirements at the eleventh hour

For clients still evaluating which structure fits their business, our guide to choosing the right retirement plan and our small business and family-owned business case studies show how these rules play out in practice.

Have a Client Weighing a Cash Balance Plan?

Contribution and deduction rules for cash balance plans are actuarially driven and entity-specific — which means the right answer for one client’s business may not be the right answer for another’s. Our team works alongside actuaries and CPAs every day to help sort through exactly these questions.

Get personalized guidance: Contact PlanPerfect to talk through your client’s specific plan design and funding situation.

Not sure where to start? Browse our plan design services or check out our compliance services to see how we support CPAs and their clients year-round.

Quick reference: Download our 2026 Retirement Plan Cheat Sheet for a fast look at this year’s contribution limits and deadlines.

About the Author: This article was contributed by Jesse St. Cyr, Partner, Poyner Spruill LLP. Jesse is a member of the Employee Benefits and Executive Compensation team at Poyner Spruill LLP. He represents clients before the IRS and DOL in matters involving employee benefits, and has extensive experience working with a diverse range of benefits and compensation matters across a variety of employers. Jesse is recognized by Chambers USA as a leading lawyer for Business (Employee Benefits & Executive Compensation).

Originally featured in PlanPerfect’s News You Can Use for CPAs — July 2026 issue.