What Is A Cash Balance Plan And How Does It Work?

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There are many different types of retirement plans, but one of the lesser known is the cash balance plan. These plans have grown in popularity in recent decades and are often used by high earners in smaller businesses to set aside more for retirement than they could in traditional plans such as a 401(k) or IRA. 

Here’s what investors should know about cash balance plans. 

What is a cash balance plan?

A cash balance plan is a type of defined-benefit plan that also shares some characteristics with defined-contribution plans, such as a 401(k). A cash balance plan’s benefit is stated in terms of the account balance, which can be used to set up an annuity at retirement, or rolled over into an IRA or another employer’s retirement plan.

For example, if an employee with a cash balance plan has an account balance of $500,000 at retirement age, they can receive an annuity based on that amount, or take a lump sum and roll it over into another plan. 

The IRS allows you to accumulate a certain account balance depending on your age and other factors, and adjusts the limit each year for inflation. A 62-year-old can accumulate up to about $3.6 million in a cash balance plan in 2025. 

Employers make annual credits to each participant’s account in the form of “pay credits” and “interest credits.” The employer manages the investments and bears the risk, unlike 401(k) plans where the risk sits with employees.

The majority of cash balance plans are offered by small businesses with fewer than 100 employees, such as doctor’s offices or law firms. The plans allow for contributions that are multiples of what’s allowed under traditional retirement plans.

Cash balance plan contribution limits

2025 Maximum contribution limits: Cash balance plan vs. 401(k)

*Note: Starting in 2025, the catch-up contribution for workers aged 60, 61, 62 or 63 is $11,250.

Source: FuturePlan by Ascensus

Cash balance plan: Advantages and disadvantages

Advantages

• Tax-deferred
  

  Contributions are tax-deferred and allow employees to pay less in taxes by lowering their taxable income.

• High contribution limits
  

  The maximum contributions depend on several variables, but are typically multiples higher than a traditional 401(k) retirement plan.

• Rollover options
  

  You have the option of rolling over your cash balance plan into an IRA or another retirement plan.

• Employer bears investment risk
  

  The investment risk lies with the employer in a cash balance plan, rather than with the employee as in a 401(k) plan.

• Federal guarantee
  

  Benefits in a cash balance plan are guaranteed through the Pension Benefit Guaranty Corporation, a federal agency.

Disadvantages

• Limited availability
  

  Cash balance plans aren’t offered widely and you can only have one if your employer offers one. Most are offered by small firms with fewer than 100 employees.

• Taxed on distributions
  

  While contributions are tax-deferred, you will be taxed once you start receiving distributions.

• Best for high earners
  

  Employees with high earnings can benefit most from a cash balance plan because they have the ability to benefit from the higher contribution limits.

• Complexity
  

  Cash balance plans can be complex to understand and it may be helpful to work with a financial advisor to develop a retirement plan that makes the most sense for you.

Bottom line

Cash balance plans are a type of defined-benefit plan that allow employees to accumulate millions in savings at retirement age, which they can then use to set up an annuity or roll over to another retirement plan, such as an IRA. The plans are popular with small businesses that have high-earning employees, such as law firms or doctor’s offices.

Contribution limits are significantly higher than for traditional retirement plans, with older workers able to set aside more than $300,000 annually.

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