Standard retirement savings vehicles often fall short of what’s possible or needed for S-Corporation owners with high and stable incomes. While 401(k)s and SEP IRAs serve many business owners well in the early stages, they eventually cap the amount that can be contributed each year. A more advanced strategy may be warranted for those looking to build significant savings during peak earnings or just before exiting their business.
Cash balance plans offer a unique solution tailored to that phase of ownership. Designed to support larger, tax-deferred contributions, they help maximize retirement savings while aligning with the owner’s compensation and timeline. Structured under the rules for qualified retirement plans, they follow formulas that emphasize consistency, control, and long-term outcomes. When structured properly, they can serve as a flexible bridge between late-career income and a future lump sum or defined retirement benefit.
Do Cash Balance Plans Work for S-Corps?
Yes, a trust as a beneficiary is allowed under IRS rules for a 401(k) or 403(b) retirement plan. You can legally name a trust to receive your account assets after your death, just as you would name an individual. However, the structure and terms of the trust will determine how the funds are taxed and how quickly they must be distributed.
A key concept to understand is whether the trust qualifies as a “designated beneficiary.” A designated beneficiary must either be an individual or a type of trust that allows the IRS to identify the underlying people who will benefit from the account. If the trust meets these conditions—often referred to as a “see-through” trust—then it may allow for slower, tax-favored distributions.
The trust is considered a non-designated beneficiary if it does not meet these requirements. This usually triggers a shorter withdrawal timeline. This may result in a greater tax burden, especially if the account holds a large sum of money.
For this reason, choosing to name a trust requires careful planning. The trust must be written in a way that complies with IRS rules and aligns with your goals for how and when the funds should be distributed. Collaborating with professionals familiar with estate planning and retirement account regulations can guide you toward a choice that properly fits your circumstances.
When Does a Cash Balance Plan Make Sense for an S-Corp Owner?
This type of plan becomes most appealing when an owner is seeking to significantly increase retirement savings in a condensed period. S-Corp owners who are in their highest-earning years—particularly those who started their business later in life or are approaching an exit—often benefit from the ability to make large, tax-deferred contributions. The accelerated funding potential of a cash balance plan can make up for lost time and align with a shorter retirement timeline.
These plans are often layered on top of a 401(k), offering a way to exceed the typical annual limits imposed by more familiar retirement vehicles. When structured correctly, the combination allows high earners to contribute well into six figures annually. However, the business must have consistent profits and a stable operational structure to support the recurring contributions these plans require. If income fluctuates or staffing is unpredictable, the plan may be more challenging to maintain.
Cash balance plans also serve a strategic role for those who anticipate a major liquidity event, such as a business sale, in the near future. The ability to reduce taxable income while building long-term retirement reserves can be highly advantageous in the years leading up to a transaction.
How a Cash Balance Plan Works
Though technically a defined benefit plan, a cash balance structure offers a more modern way of presenting retirement funding progress. Instead of relying on abstract projections, it uses hypothetical account balances that help participants better visualize their expected benefits. Here’s how the plan operates:
Employer-Funded with Hypothetical Balances: Unlike traditional defined benefit plans that guarantee a fixed monthly benefit, cash balance plans express the benefit as a notional balance. This gives participants a clearer picture of what is being accumulated over time, even though the balance is not tied to actual investment returns. Additionally, the employer—not the participant—bears the investment risk, even if the balance appears to grow like a 401(k).
Actuarially Determined Contributions: An actuary calculates the necessary contributions each year based on the participant’s age, compensation, and the plan’s funding goals. The result is a predefined path toward a targeted benefit amount, which increases as participants approach retirement age. These contributions may need to be adjusted periodically to account for changing interest rates or funding status.
Predictable Growth Through Interest Credit: Plans include an interest crediting rate that compounds the hypothetical balance annually. This rate may be tied to a market index or set as a fixed percentage, creating a reliable model for how the benefit grows. That said, even though the growth is predictable on paper, the actual cost to the employer can vary based on investment performance.
Compliance-Driven Design: The plan must follow specific IRS regulations regarding benefit limits, nondiscrimination testing, and funding obligations. Plans must also meet minimum funding standards set by the Employee Retirement Income Security Act of 1974 (ERISA) and may require contributions even during years of low business income.
While these rules are strict, you can still design the plan to align with your overall financial strategy.
Clear Benefit Funding Obligation: Given this is a defined benefit plan, the sponsoring business commits to meeting the funding targets each year. This differs significantly from a defined contribution plan, where annual funding can be discretionary and participant-directed
How Much Can You Contribute Through a Cash Balance Plan?
Contribution amounts in a cash balance plan are not chosen arbitrarily—they’re calculated to support a predetermined retirement benefit. This allows for greater flexibility and scale than most business owners are used to. Unlike capped contribution vehicles, these plans grow more generous with age, meaning individuals closer to retirement can fund substantial amounts over a shorter period. The ability to make high deposits year after year provides a pathway to accelerate retirement savings while reducing taxable income.
Rather than thinking in terms of a fixed retirement account limit, think of the funding goal as reverse-engineered from the eventual benefit. This approach provides a disciplined method for reaching a specific target for S-Corp owners with steady earnings and minimal time left before stepping away from the business. The annual contribution is not based on a set dollar figure but on accurate projections built around age, compensation, and plan design—making the plan dynamic.
Please Note: Contributions to a cash balance plan generally range between $100,000 – $350,000 each year, depending on age and income. Plans are generally structured to fund a total benefit up to $3.5 million ((indexed for inflation each year) at retirement age, most commonly age 62.2
Setup, Maintenance, and Administrative Responsibilities
Putting a cash balance plan in place typically involves multiple specialists, including a third-party administrator, an actuary, and sometimes an attorney. You’ll also want to stay in close contact with the accountant who handles your S-Corp tax return. The initial design phase is where professionals draft the plan documents and confirm it matches your intentions.
Throughout each plan year, there will be filing tasks, ongoing monitoring, and obligations to deposit funds by specific deadlines. These requirements can involve the IRS Form 5500 and additional details about plan assets. Because of the nature of defined benefit formulas, you’ll have to make contributions that meet certain minimum levels.
Failing to do so might trigger IRS penalties or place the plan out of compliance. For example, IRC Section 4971(a) levies a 10% excise tax on the full amount of outstanding minimum required contributions that haven’t been made by the end of the year. If that obligation is still not resolved, IRC Section 4971(b) authorizes an additional 100% excise tax on the outstanding amount.3
Costs can vary based on how elaborate your arrangement is and how many employees are involved. You might expect setup fees plus yearly fees for administration and actuarial services. Deadlines for contributions usually line up with your business tax return due dates, including extensions, which provides some flexibility in how you handle each funding requirement.
Please Note: Keep in mind that this is a longer-term commitment. While you can terminate the plan if you need to, doing so too soon or too often might diminish the advantages. It’s best to confirm you’re comfortable with the obligations and timeline before you move forward.
What Happens If You Need to Shut the Plan Down?
Despite best intentions, situations arise that call for discontinuing a cash balance plan. You may decide to halt operations because your business finances have changed, you plan to sell the company, or retirement is now on your radar. The process isn’t instant, and it involves steps designed to protect participants and finalize obligations.
When you terminate voluntarily, an actuary will calculate each participant’s benefit and inform the plan of the total amount owed. The plan sponsor (you, as the S-Corp owner) then arranges the final funding. After that, participant benefits can be distributed or rolled over into an IRA or another account, depending on preference and eligibility.
The IRS requires notification of the termination, along with standard filings to confirm all final contributions and distributions match plan rules. Any incomplete funding has to be remedied at that point. If your plan is insured through the Pension Benefit Guaranty Corporation (PBGC), that entity also has guidelines you must follow when concluding the plan.
Freezing a Plan vs. Shutting It Down
Cash balance plans don’t have to be terminated if your business faces challenges. The plan offers a flexible alternative to “freeze” when business circumstances change unexpectedly. Freezing allows you to pause new benefit accruals temporarily without shutting the plan down entirely. This means participants stop earning new credits, but the existing balances remain intact and continue to accrue interest based on the plan’s terms.
This option is especially valuable during lean years or periods of uncertain cash flow. Rather than triggering the complex process and costs associated with plan termination, freezing provides breathing room while maintaining the long-term structure of the plan. When your business stabilizes, you can unfreeze and resume contributions without needing to start over or lose previously accrued benefits.
Freezing a plan also preserves the ability to make retroactive contributions for the prior year—so long as the plan was established by the business tax filing deadline (including extensions). This retroactive flexibility can offer an important planning opportunity if a business has stronger-than-expected profits late in the year or during tax season.
Risks and Considerations to Think Through First
While a cash balance plan can be a powerful tool for building long-term wealth, it’s not the right fit for every business. These plans come with technical requirements, legal obligations, and financial commitments that demand careful evaluation. Before deciding to move forward, consider these potential trade-offs and operational demands:
Annual Funding Requirements: Once the plan is active, you must keep up with the contributions that the actuary projects. If your S-Corp has a rough year, you must still meet a minimum deposit. That alone might be challenging if your income takes an unexpected dip.
Greater Administrative Burden: Compared to simpler approaches such as a Solo or SEP IRA, a cash balance plan requires more attention and support from third-party experts. Extra fees, additional forms, and precise calculations all factor into the cost of maintaining the program.
Employee Participation Rules: If you have staff members who qualify, they must be included. This can significantly increase your total obligation each year. One of the main considerations is Balancing your goals with the expense of covering employees.
Plan Design and Funding Inflexibility: While there can be slight variations in contribution amounts from one year to the next, the overall framework isn’t meant for large swings. You’re essentially committing to a formula tied to age, compensation, and a forecasted account balance at retirement.
Audit Risk Is Real but Manageable: Higher-value plans may attract closer scrutiny from the IRS. With proper documentation, thorough testing, and accurate filings, there’s less reason to worry, but you should be prepared for the possibility that an in-depth review could occur.
Cash Balance Plans for S-Corps (FAQs)
Cash balance plans can raise distinct questions for those who are used to simpler programs. Below are common concerns and their brief explanations:
1. Can a cash balance plan be frozen if business income changes unexpectedly?
Yes. If your business hits a rough patch, you can pause future accruals by freezing the plan—existing balances stay intact and continue to grow with interest. You can restart contributions later if conditions improve.
2. What are the contribution limits for a cash balance plan, and how do they benefit high earners?
For 2025, the IRS allows a maximum annual benefit of $280,000 in a cash balance plan, with lifetime funding limits that can exceed $3.5 million depending on your age and plan structure. Annual contributions typically range from $100,000 to $350,000, though they can go even higher for older business owners nearing retirement. The contribution amount is calculated by an actuary based on your W-2 wages, age, and the plan’s benefit formula—not simply chosen at will.
These high contribution limits create substantial tax advantages for business owners in top income brackets. Unlike many retirement plans with relatively modest caps, a cash balance plan allows you to move a significant amount of taxable income into a tax-deferred space each year. For owners paying federal and state rates north of 40%, that could translate into six-figure annual tax savings—while also accelerating retirement savings. It’s one of the few tools that lets high earners lower current tax bills and build long-term wealth at scale.
3. Can a cash balance plan be set up retroactively?
Yes, a cash balance plan can be adopted after the close of the calendar year, as long as it is established by your business tax filing deadline—including extensions. Contributions made during that window can still apply to the prior tax year, allowing year-end planning flexibility.
This feature can be especially helpful if your business has stronger-than-expected income or if you’re looking for last-minute tax deduction opportunities. However, setup involves plan documentation and actuarial support, so don’t wait until the last minute to initiate the process.
4. What if the only employees are the owner and spouse?
Plans involving only an owner and their spouse are common, particularly in small professional practices or consulting businesses. Both individuals must receive W-2 wages in order to be eligible for contributions.
Even in this setup, nondiscrimination testing still applies. The plan must be properly structured to demonstrate fairness in benefit allocation, but with only two participants, it’s typically more straightforward to maintain compliance.
5. Are plan contributions flexible year to year?
Cash balance plans offer less flexibility than defined contribution plans. While the actuary can provide a funding range each year, contributions are generally expected to follow a consistent path toward the retirement benefit target.
That said, the funding range gives some room to adjust based on cash flow. If your business faces a tight year, it’s possible to contribute closer to the lower end. Still, skipping or drastically underfunding a year can raise compliance issues and may require corrections or plan amendments.
6. Will this increase audit risk from the IRS?
Higher contributions and the use of defined benefit structures can attract more scrutiny, particularly if your deposits are at or near the maximum allowed. However, audit risk doesn’t mean you’ve done anything wrong—it simply means the IRS may take a closer look.
Maintaining accurate documentation, working with qualified professionals, and performing annual compliance testing will keep the plan on solid ground. A properly managed plan can withstand audit scrutiny and continue functioning smoothly without interruption.
7. Can you combine a cash balance plan with a 401(k) plan?
Yes, combining a cash balance plan with a 401(k) is not only allowed—it’s often a best practice for high-income business owners. Doing so lets you layer multiple types of tax-advantaged contributions, increasing total retirement savings across both plans. Many business owners contribute the maximum to their 401(k) and then use the cash balance plan to go further.
When paired, these plans are treated as one for IRS testing purposes. That means nondiscrimination rules and coverage requirements apply across the combined structure. It’s important to work with an experienced administrator who can coordinate the design and testing of both plans.
This pairing also opens the door to strategic planning. A 401(k) provides employee deferrals and employer match flexibility, while the cash balance plan focuses on predictable long-term benefit funding. Together, they create a comprehensive retirement package tailored to owners seeking higher contribution limits and meaningful tax deductions.
We Help with Cash Balance Plans for S-Corps
Cash balance plans are not just retirement tools—they’re financial planning instruments that impact taxes, compensation, and long-term wealth building. For an S-Corp business owner, the decision to implement one should be guided by more than a desire to contribute more. It requires a clear understanding of how the plan fits into your broader financial picture, including business cash flow, exit planning, and legacy goals.
A financial advisor is a key part of making this process work effectively. Our professionals can help determine whether your compensation is structured appropriately to support the plan, assess whether your income pattern and tax profile align with the plan’s demands, and coordinate with actuaries and plan administrators during setup. We’ll also help you compare different plan designs, consider how the plan fits alongside existing retirement accounts, and evaluate the effect on your short- and long-term objectives.
Once implemented, we continue to help you monitor contribution levels, explore funding ranges, and maintain compliance with Employee Retirement Income Security Act (ERISA) rules. We will also work closely with your CPA and an actuary so every angle is considered—from annual funding obligations to tax filings and long-term projections.
If you’d like to explore next steps, we welcome you to schedule a call. A short conversation can help determine whether you’re positioned for higher contributions and whether this might be a good fit. Being a business owner comes with many decisions—your retirement plan is one we can tackle together, without confusion or missed details.
Resources:
- https://www.irs.gov/pub/irs-drop/n-24-80.pdf?utm_source=chatgpt.com
- https://www.emparion.com/cash-balance-plan-lifetime-contribution-limits/
- https://www.irs.gov/retirement-plans/standard-terminations-underfunded-single-employer-defined-benefit-plans#:~:text=IRC%20Section%204971(a)%20imposes,if%20specific%20conditions%20are%20satisfied
Clayton joined AP Wealth Management as a fee-only financial planner in 2019 bringing with him over a decade of experience working as a financial planner and investment advisor. Clayton is passionate about the commission-free business model that allows him to sit on the same side of the table as the client, serving as a fiduciary for them.
