A 2025 REMINDER ABOUT A LEADING TAX REDUCTION & RETIREMENT SAVINGS TOOL
Most high-income professionals, including physicians, are on the lookout for ways to reduce taxes, protect assets and build retirement wealth. A Cash Balance Plan (CBP), a type of defined benefit Qualified Retirement Plan (QRP), may be an ideal tool to achieve all three planning goals. We have been analyzing CBPs for clients for more than five years. In fact, on our Wealth Planning for the Modern Physician Podcast, OJM partner and host David Mandell, JD, MBA dedicated an episode to CBPs back in Season 2, which you can listen to here.
Certainly, CBPs have become increasingly popular for doctors and other professionals – and none other than the Wall Street Journal recently published the following headline: “The Retirement-Savings Weapon Doctors and Lawyers Use to Build Wealth.” You can read the article Since CBPs are getting more press recently, we remind our subscribers about them with this brief summary.
How Cash Balance Plans are Similar to and Different from Traditional Defined Benefit Plans
CBPs are like traditional defined benefit plans in terms of the funding and reporting requirements. Minimum funding standards apply; there is a minimum annual employer contribution that is reported on the CBP’s tax form 5500. An actuary is required to calculate this contribution amount using a reasonable actuarial funding method and actuarial assumptions specified by the IRS. The employer can decide to contribute an amount between the minimum funding requirement and the maximum permitted deduction but should attempt to fund to the actuary’s recommended contribution level in order to meet the plan’s current benefit liability.
On the other hand, CBPs are different from traditional defined benefit plans that promise a specified monthly benefit amount at retirement (i.e., 3% of pay per year of employment, payable at the retirement age of 67). CBPs define benefits in the form of an account balance, rather than a periodic amount. This can be helpful because employees always understand what they are entitled to under the CBP, since it is a specific amount. Owners and employees both know what is going into the plan on their behalf, and what will come out when they leave.
Benefits of CBPs
There are five compelling reasons why medical practices and businesses are interested in CBPs:
- Cash Balance Plans Work Well with 401(k)s: CBPs are not mutually exclusive to 401(k)s. In fact, a business or practice can typically utilize both types of plans simultaneously by “layering” a CBP on top of their existing 401(k).
- Significantly increased deductions for plan contributions: In 2025, 401(k)s are subject to maximum deductible contribution limits of $23,500, with profit-sharing plan limits at $70,000. These limits will increase slightly each year. Properly structured CBPs, on the other hand, can allow business owners to make tax-deductible contributions of $200,000 or more, potentially saving them $80,000 to more than $100,000 in income taxes annually.
- Additional Costs are Much Less than Additional Tax Savings: CBPs usually involve higher annual administration costs and higher employer contribution amounts for employees than 401(k)s and/or profit-sharing plans. Nonetheless, the tax savings typically dwarf these additional expenses, making the CBP attractive.
- Greater Access to Top (+5) Asset Protection Level: As an exempt asset under federal law and most state laws, ERISA-qualified QRPs are protected at the highest (+5) level. Unless a CBP is put in place for only one owner, with no other employees, this ERISA protection will usually also apply to the CBP. With larger contribution levels allowed in the CBP, this means more wealth can be protected in the CBP than in most other QRPs.
- Possible Second Level of Tax Deduction: For those whose income puts them above the tax code’s qualified business income (QBI) threshold limits, CBPs can be tools to reduce taxable income enough to qualify for the QBI deduction even if taxpayer’s business is a specified service trade or business, like a medical practice. In this way, the CBP can create one deduction that leads to a second deduction.
Conclusion
Cash Balance Plans are powerful planning tools that provide larger contributions than the QRPs most businesses and medical practices use today. CBPs can be attractive to owners who are looking for greater tax deductions, asset protection, and superior retirement savings.