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Cash Balance Plans Can Help Mitigate Higher Tax Liabilities

February 11, 2021

Given the current economic environment and federal tax proposals, we expect Cash Balance Plans to become more popular as businesses try to limit future tax liabilities.  

With the inauguration and swearing-in of our new President and Congress, many investors are wondering how the new administration will reshape taxes for corporations and individuals over the next four years.  Controlling the pandemic and fixing the economy is expected to be front and center over the first 100 days of office.  Addressing these issues will require significant amounts of stimulus and fiscal support.  Lawmakers will question how the government plans to pay for these programs. 

During his campaign, President Biden proposed a number of changes to the tax code to support a domestic spending agenda.  The proposals are estimated to raise federal revenues by $2.1 trillion over the next decade with the bulk of the tax increases impacting higher income households.  Changes include repealing the 2017 Tax Cuts and Jobs Act tax rates for households earning over $400,000, taxing long-term investment gains at ordinary income rates for households earning over a million, taxing unrealized capital gains at death and increasing the estate tax.[1]

Weighing the prospect of larger tax bills, Cash Balance Plans can be a great retirement savings tool for small business owners and entrepreneurs to mitigate higher tax liabilities.

A Cash Balance Plan is a form of pension plan or Defined Benefit Retirement Plan that provides the option of annuity income or lump sum distribution at retirement.  Cash Balance Plans differ from traditional Defined Benefit Plans in that the account value is maintained on an individual basis.  Each eligible employee receives a credited amount based on their compensation over the plan year (pay credit).  The value of the Cash Balance Plan grows over time by a predetermined credited amount (interest credit).  A unique feature of a Cash Balance is the account value is not impacted by gains or losses in the investments.  Contributions are the responsibility of the employer and most importantly a business expense.  Designing a Cash Balance Plan to maximize tax benefits and pursue your goals requires teaming with the right Third-Party Administrator (TPA) and Actuary that understand the IRS rules and regulations.

An overwhelming benefit of Cash Balance Plans is the high tax deferral rate.  The maximum annual contribution per participant is $230,000.  This compares favorably to a 401(k) maximum contribution limit of $58,000 ($64,500 including catch-up contributions).  Additionally, a Cash Balance Plan does not preclude a business owner from also maintaining a 401(k) Plan.  Employers looking to exhaust all retirement savings opportunities can maintain both a Cash Balance Plan and 401(k) Plan.  The 401(k) would be subject to different profit-sharing rules versus a standard 401(k) due to IRS regulations.  The eligible participant would still be able to maximize the elective deferral contributions of $19,500 ($26,000 including catch-up contributions). 

Tapping both a Cash Balance Plan and 401(k) Plan provides eligible business owners and entrepreneurs with significant tax benefits due to the higher contribution limits. 

To learn more about Cash Balance Plans, please contact our office.

[1] Gleckman, Howard. (2020, October 15). TPC Updates Its Analysis: Biden Would Raise Taxes by $2.1 Trillion, Nearly All On Business and High-Income Households. Retrieved from 


This information is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.