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Cash Balance Plans: Another Retirement Plan for Professionals

fistfull of cash

Today’s Saturday Selection from the White Coat Investor is an oldie but goodie discussing defined benefit pension plans, also known as cash balance plans.

While the plans aren’t available to W-2 employees, they can be an option for those whose income is earned as a 1099, i.e. the self-employed and practice partners. The higher your marginal tax rate, the more benefit you’ll see from a cash balance plan. Read on to learn more of the pros and cons.

If you’re interested in starting a cash balance plan (defined benefit plan), we have a short list of Business Retirement Account Specialists who can help you with this.

As always, this classic article first appeared on The White Coat Investor.


The single best tax break available to you is maximizing your retirement plan contributions.  Most self-employed or partnered doctors already have a defined contribution/profit-sharing plan (SEP-IRA or 401K) available to them into which they can contribute $50K a year ($55K if you’re over 50.)

If your federal and state marginal income tax rate is 40%, you just knocked $20K off your tax bill.  But what if you want to save more of your money toward retirement?  You can use a backdoor Roth IRA or even a taxable account, but neither of those reduces your tax bill this year.  One option you should consider is using a cash balance plan.


A Cash Balance Plan is a Hybrid Retirement Plan


A cash balance plan is a type of defined benefit plan (pension) that acts like a defined contribution plan (401K).  When private companies were trying to get rid of their expensive pension plans, many of them converted their pension plans into cash balance plans, since they cost the company less.

Employees didn’t like this, as their benefits were often lower, but it does provide an option for a physician or similar professional to shelter some more money from Uncle Sam.  Here’s how it works:

How a Cash Balance Plan Works


Every year, your company (i.e. you if you’re the owner or a partner) makes a contribution toward the cash balance plan, usually at the end of the year on your behalf.  That money is invested by your company’s chosen investment manager (you don’t choose the investments like in a 401K).

At the end of the next year, your “account” (which legally is not technically yours, but the company’s) is credited with a certain interest rate, often fixed at something like 5% or a variable rate tied to the IRS treasury interest rate (3.88% currently), and another contribution is made by the company.  That 5% comes from the investments the company made.

If the investments did better than that, the company puts them toward future years in a reserve account.  If they did worse, the company pulls from the reserve account so it can still credit you with 5%.  If the plan has a big loss, the company may have to make a larger contribution the next year, but if the reserve account starts getting too large, the company can amend the plan and make an additional distribution to the “individual accounts” within the plan.  In essence, the company is taking the investment risk, not you.  Of course, for many doctors, you are the company, so you’re taking it either way.


fistful of cash
a fistful of dollars


The White Coat Investor’s Cash Balance Plan


My cash balance plan, with MedAmerica, set up defined benefit cash balance plan for our partnership a little differently.  The Pension Protection Act of 2008 now allows the plan to pay the participants the actual returns of the plan instead of the IRS Treasury Rate, with the caveat that the return can’t be less than zero.

The plan also decided to cap the return at 6.5%, with extra earnings (if they occur) going toward a reserve account to be drawn upon in the event of market losses.  The money is invested across 8 mutual funds, in a 54%/46% stock/bond ratio.  Each year, an investment committee (made up predominantly of physicians in the plan) decides how much interest to credit the participants.

In the event the investments have little to no return, participants don’t get an interest payment.  In the event of a high return, the interest is capped at 6.5% and the rest goes into the reserve account.  In the event of a really low return, the company has to make an extra contribution to the account to make up some of the losses.  While that sucks to have to do in an economic downturn, especially when you’d rather be buying low yourself in your personal accounts, at least by doing so the plan is buying low, which should improve future returns.

When you retire or leave the company, you don’t get any share of that reserve account even if there have been recent high returns in the plan, but nor are you required to make an extra contribution if the plan has a significant loss the year you separate from the company or partnership.

How much more could you have to contribute in the event of a severe market downturn?  In 2008 the MedAmerica plan lost 22.8%.  First the reserve account was applied, reducing the net loss to about 15%.  By law that loss is spread over 5 years, so it is divided by 5.  The “company” (i.e. the partners in the plan) had to make their regular annual contribution, plus 3% of what they had in their “individual account” in the plan at the beginning of 2008.  So if you started 2008 with $100K in the account, and your annual contribution was $10K, the contribution due at the end of 2008 was $10K + 3%*$100K, or $13K.  Of course, that entire $13K is tax-deductible.  There was also a much smaller contribution due in 2009, but investment gains have the plan back into a surplus.

Like in a 401K, the money grows in a tax-deferred manner, and you can’t access it before age 59 1/2, except for some limited circumstances, without paying a 10% penalty (plus the taxes due).

When you retire or separate from the company, you can either annuitize your “account balance” or you can take it as a lump sum, either in cash or by rolling it over into an IRA or another retirement plan.

How Much Can You Contribute to a Cash Balance Plan?


That’s, unfortunately, a really complicated question.  It depends on how much is in there and how old you are.  There’s a law that only let’s you accumulate up to ~$2.5 Million into the cash balance plan.  So the older you are, and the less you have in there, the more you can contribute.  In general, you contribute either a percentage of salary or a flat sum (such as $5,000 or $40,000) each year.

Of course, if you have employees, non-discrimination testing must be done and you should plan on contributing 5-7.5% of their salary for each of them.

Maximum contributions may range from $50K for a 35 year old to $200K for a 65 year old. But many plans, due to actuarial restrictions and top-heavy testing, limit you to much less.  Mine, for instance, currently limits partners to $15K per year (which knocks about $5K off my federal tax bill and another $750 off my state tax bill.)


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Watch Expenses in Your Cash Balance Plan


Expenses for these plans can be considerably higher than for a 401K plan, because they have to be run by an actuary.  My plan charges 0.6% of plan assets per year, in addition to the expense ratios on the funds used in the investments (which range from 0.07% to 1.26%).

A Cash Balance Plan is a Good Option for Partnerships


According to a presentation put together by, 28% of cash balance plans are run by/for physician partnerships, another 9% by dentists, and a further 9% by attorneys.  Despite the additional expense, the immense tax break available, as well as the asset protection (generally fully protected from creditors, just like a 401K) make them particularly attractive to these professionals.

The flexibility available through the plans is also a huge benefit.  Partners can make different contributions, the plan can often be made physician-only, liability between partners can be managed, and you can scale back on contributions or even amend or terminate the plan relatively easily if cash flows decrease.

A cash balance plan is a far better option for additional tax savings than purchasing a variable annuity or cash value life insurance since it not only grows in a tax-deferred manner, but it also gives you an upfront tax break and lower expenses than most life insurance products.


What are the Downsides to a Cash Balance Plan?


It’s possible the investments perform poorly for a long period of time and you have to make up the interest payments out of your cash flow.  That doesn’t seem like a big deal if you have to make up a 5% payment on a $50,000 balance ($2500), but coming up with $50K could be a huge issue if you have a $1 Million balance.

If you’re not already saving $54K into a 401K (and probably maxing out backdoor Roths for you and your spouse), then you’re unlikely to benefit from a cash balance plan, especially given the decreased flexibility and higher expenses which drag on returns.  The average physician (making $200K) probably doesn’t need one of these plans simply because she doesn’t make enough money to really benefit from them.

Although the money in the plan technically belongs to the company, not you, the assets must be managed for your benefit and are not subject to the company’s creditors.  The pension is also usually insured by the Pension Benefit Guaranty Corporation, a government entity.  Your company generally pays $35 per year per participant for this insurance, but may be exempt if there are fewer than 25 employees.

Also, if you’re required to make significant contributions for your employees, this can be an additional practice expense, eliminating the personal benefit to you, the owner.


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Have you participated in a cash balance plan? How does yours differ from Dr. Dahle’s? Are the fees reasonable? Share your experience below!

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8 thoughts on “Cash Balance Plans: Another Retirement Plan for Professionals”

  1. Hi,my name is Kimberly Harrison I’m just trying to understand how the retirement plans work I’m not able to completely understand the whole process yet but I’ve been studying my grandpa’s retirement plans for many years, he passed away nearly 40 years ago and my dad passed about 6 years ago and my grandma passed before my dad but she once told me that her kids and grandkids and even great grandkids would be okay one-day.I know that my grandpa retired having 3 retirement plans from where he worked and he also had union benefits as well and life insurance for all his kids,himself and my grandma and even group insurance for him and grandma along with stocks. And every year when he filed taxes he put it all into retirement plans to be matched by the company he retired from, he also paid what is called what I think is called allocation payments or something like that for many years being a monthly payment he paid at the bank I have his little payment book that tells how much and when his payments had to be paid. In 2005 the individual policies became stock into the company as well and we still have the majority of those policies even though there’s only a few left the policies belong too Im still trying to get my dad’s back from the funeral home because they say they can’t find it and we done been to court once over them charging us for the vault that was included I know they have cashed it in but I’m not sure who I can call next since I have already spent a week on the phone with the insurance company and they told me they never received it and they only received the invoice and never the original policy and the copies I had the funeral home to copy for me actually confirmed that story so at the moment I’m lost on that part as well. I would really like help understanding this whole process though since I’m not sure but I think the paper I had to send the IRS a couple of years ago with my dad as beneficiary was based on this whole process of retirement on my grandpa so In order to help myself and the rest of the family I have left I figured I best try to find and understand how it all works. As well as what it does and does not mean for me and my family.Basically what we are entitled to and as to whether or not we owe taxes or not since my grandparents were tax exempt. But if so how much would we owe and how to come up with it so we could be able to get our inheritance my grandma told me about. I’ve done lost my grandparents and my dad along with a few others I don’t have much family left my uncle is sick with prostate cancer as I am writing this and he doesn’t won’t surgery so I’m not sure how much time he has without it or even if he did how much time that would be for him but I would like to be able to help him more than I’m able to at the moment. So any advice you may have on the situation would be greatly appreciated cause at the moment I honestly can’t afford to pay someone to help me with this. So greatly appreciated would be an understatement to just how much it would be appreciated. Thank you,Kimberly Harrison P.S. the payment book was like annual percentage rate payments that was based on like 30 or more years at like an 8% percent rate and I have his retirement book but I only have 2 of the 3 retirement plan numbers I also have his last year of taxes he filed along with his group policies would you say that they are useful in the situation.Anyways thanks again and I enjoyed reading your story it was very interesting.I hope you have yourself a nice day.

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  3. Im a w2 full time ($325k) physician with somewhat of a substantial (~$210k) 1099 income from locums+side hustle. Bordering on higher marginal rate than id like.

    Maxed all avail tax advantaged accounts to allowable ie, solo 401k, hsa, back door roth + spousal, 529 etc. Currently 38 yo. I dont use a pass through and file as self employed. Could somehing like CBP be applicable/advisable for someone in my shoes?

    • Did you already put a Cash Balance Plan in place? You are on the younger end of the spectrum for a Cash Balance Plan, but you are still a great candidate. You could likely contribute $90k – $100k to a Cash Balance Plan in 2018 based on your $210k in 1099 income. The plan can be set up to meet your contribution and deduction needs.

      The other opportunity you might not be taking advantage of with your solo 401(k) is making voluntary after-tax employee contributions. You contribute on an after-tax basis and then you do an in-Plan Roth conversion on these after-tax contributions. It is the “super-sized” back door Roth within your 401(k). Note your current solo 401(k) Plan might not allow you to make voluntary after-tax employee contributions.

      Please contact me if you have any questions.

      • Please clarify what is roughly the cash balance and solo 401k combined limit for a 35 year old making for example 500k 1099. I have heard it is only 94k to other websites listing the combination of 401k and cash balance being 127-143 for a 35 year old. I know in 2019 the 6% PS is now based on 280k and the employee deferral is now 19k which are all increasing from past years.

        Any clarification would be great. The two sites below have similar numbers. I just want to make sure it is not some marketing trick and it is actually that high for a 35 year old.

  4. I’m in a new partnership and we’re setting up a cash balance plan. Based on my age and income, I can put $95k in per year. The plan advisors are telling me that by law my profit sharing in my 401k will be limited to $15,900. I can still put in the $18k employee limit. They also say I can withdraw at 55 and can convert to an IRA on separation. Any know about this, especially the 401k issue? Thanks

    • In 2017, the most an employee could defer into a 401(k) Plan was $18,000.

      When an employer has a Cash Balance Plan and a 401(k) Plan in place, there are combined plan deduction limits that apply. When a large contribution is made to the Cash Balance Plan, the profit sharing contribution % limit is reduced from 25% of pay to 6% of pay. The $15,900 profit sharing amount is equal to 6% of $265,000.

      $265,000 was the plan compensation limit for 2016 and $270,000 was the plan compensation limit for 2017. This means that even if your w2 was higher than $265,000 in 2016, $265,000 is the most that can be taken into account for retirement plan purposes.

      If you terminate employment with your employer, you will be able to roll over your money from the 401(k) to your IRA and most likely you will be able to roll over your money from the Cash Balance Plan to your IRA.

  5. That is one of the best, clearest intro summary of a cash balance plan that I have seen. This can be very confusing to even financially savvy docs, causing them to unnecessarily delay joining.

    My only question with your article is what happens when a partner physician leaves or retires with a “shortfall” in their account. It was a explained to us that the doc would be responsible for catching up their account prior to leaving, with the exception of losses from the current year, as the interest credit has not yet been applied. Is this not the case?

    • The Cash Balance Plan assets are held in a pooled account and that one account is used to pay everyone out when the plan terminates. When a partner physician leaves or retires, the plan has to be at a certain funded percentage before the retiring/leaving partner physician is able to roll their portion of the plan assets out of the plan.

      The partners collectively or the retiring/leaving partner himself/herself would need to contribute enough money to the plan to get it to the needed funded percentage.


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