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If your clients sponsor a cash balance plan, the rules governing contributions and deductions work differently than the fixed statutory limits you’re used to with defined contribution plans. Because cash balance plans are a type of defined benefit plan, minimum required and maximum deductible contributions are calculated actuarially — not just by statute. That means an enrolled actuary determines these figures each year based on participant demographics, compensation, plan design, investment performance, and the plan’s funded status.
For CPAs advising business owner clients, understanding a few key rules can make the difference between a smooth deduction and an unpleasant surprise at tax time.
A common planning issue comes up when a client sponsors both a PBGC-exempt cash balance plan and a defined contribution plan — most often a 401(k) profit-sharing plan. This pairing is popular for a reason: it’s the foundation of many combination plan designs used to maximize tax-advantaged savings for owners.
When both plan types are in place, IRC §404(a)(7) imposes a combined deduction limitation. Here’s the part that trips people up: employer contributions to the defined contribution plan that stay at or below 6% of participant compensation generally get favorable treatment under the rule.
A few important clarifications:
Entity structure has a direct effect on how cash balance plan contributions are funded and deducted.
Corporations and S corporations: Required contributions are generally based on actuarial funding requirements, not current-year profitability. That means a business can still owe a contribution in a year with little or no income — a scenario that catches many owners off guard.
Sole proprietors: Deductible contributions are capped by earned income. If the business has little or no net income for the year, deductibility may be significantly reduced or unavailable altogether. This creates a real tension when a plan’s actuarially determined funding requirement exceeds what the owner actually earned that year.
Understanding which side of that line a client falls on is often the difference between a plan that delivers major tax savings and one that creates a funding headache.
Cash balance plans can require contributions even when a client’s business income declines. Investment losses, updated actuarial assumptions, or an existing funding shortfall can all create minimum funding obligations that must be satisfied to keep the plan in compliance — regardless of how the year actually went.
Because both contribution requirements and deduction limits are determined actuarially, the best move for CPAs is to encourage clients to loop in their actuary and third-party administrator before year-end, not after. Early coordination helps:
Cash balance plan compliance sits at the intersection of actuarial science, plan design, and tax strategy — which is exactly why coordination between CPAs, actuaries, and third-party administrators matters so much. If you have clients navigating combination plan designs, 6% deduction limits, or entity-specific funding questions, our team can help you get ahead of it.
Learn more about how PlanPerfect works with CPAs, or explore our guide on what TPAs actually do for a refresher on where the administrator’s role begins and ends.
Have a client with a cash balance plan question? Contact PlanPerfect or call 949-223-8397 to talk through the specifics before your next filing deadline.
Content adapted from “Cash Balance Plans: Key Deduction and Funding Considerations for CPAs” by Jesse St. Cyr, Partner, Poyner Spruill LLP — originally published in PlanPerfect’s July 2026 CPA newsletter.
