Cash Balance Plans With Employees

In a typical combined design, employees receive contributions through the 401(k) side (a 3% safe-harbor contribution plus a profit-sharing allocation) totaling roughly 5% to 7.5% of their pay. The owners receive their allocations primarily through the cash balance plan, where amounts are set by age and compensation. Employees do not receive a match of the owner's dollars; the plan passes testing on projected benefits rather than on contributions.

The orthodontic practice in our case studies shows the shape, with $417,000 of owner contributions carrying a $35,000 total employee cost, 92% of plan funding to the owners, subject to annual nondiscrimination testing.

Three sets of rules govern every design. Coverage rules (IRC 410(b)) require the plan to benefit a fair cross-section of employees rather than owners alone. Nondiscrimination rules (IRC 401(a)(4)) require benefits to be equitable, and this is where cross-testing does its work: contributions are converted to projected benefits at retirement, so a $6,000 contribution for a 28-year-old (with nearly four decades to grow) can test as equivalent to a far larger contribution for a 55-year-old owner. Top-heavy and gateway rules then set the floor: when owners take large allocations, staff in the combined plan must generally receive a minimum gateway contribution, up to 7.5% of pay.

None of this is a loophole; it is the intended architecture. The tests exist so that a plan can be legitimately uneven, and the actuary's annual certification is what makes the owner's deduction safe.

Everything turns on the census: each employee's age, pay, and hours. Cross-testing runs on time-to-retirement, so the design thrives when owners are meaningfully older than staff.

Take an owner of 55 paying themselves a $300,000 W-2, with eight employees averaging age 32 and $55,000 of pay, and an existing 401(k) amended to safe-harbor status. Run through the same engine as our calculator, the owner's 2026 cash balance contribution comes to $262,428. On the 401(k) side the owner defers $24,500, adds the $8,000 age-50 catch-up (Roth-only, because W-2 wages exceed the SECURE 2.0 threshold), and receives a 6% employer contribution of $18,000, split 3% safe-harbor nonelective and 3% profit sharing so that employer 401(k) money stays at the 6% line the combined-plan deduction rule requires.

Staff are covered through the 401(k) side at 7.5% of pay: the 3% safe-harbor nonelective plus a 4.5% profit-sharing allocation that satisfies the gateway minimum for a combined plan. Across $440,000 of staff payroll that is $33,000, fully deductible; at an assumed 40% combined marginal rate the after-tax cost is roughly $19,800. The business needs profit of about $313,000 above the W-2 to fund the employer pieces.

Adding a cash balance plan rarely means starting over. The standard move is amending your current 401(k) to safe-harbor status so it pairs cleanly with the pension, keeping your provider and investment lineup. Profit-sharing allocations can be class-based (different amounts for different employee groups, inside the testing limits) and can carry a vesting schedule (2-to-6-year schedules are common), which turns required contributions into a retention tool.

Eligibility rules also matter more than owners expect: plans can set age and service minimums, so new hires and many part-time staff may not enter immediately — though recent law has expanded 401(k) access for long-term part-time employees, which your administrator should be tracking.

Some censuses don't support the design: several older, well-paid non-owner employees; profits too thin or volatile to carry a funding commitment plus staff costs; or a team so large relative to owner income that the split can't clear the tests attractively. In those cases the right move is usually a richer 401(k)/profit-sharing design now and a cash balance plan when the census or profits shift. A proposal built on your actual employee census, rather than a generic illustration, is how you find out which side you're on.