But how can a retirement plan effectively achieve these objectives?

  Clearly define your goals

For professional firms, setting the right balance between cash compensation and retirement benefits requires a comprehensive approach designed outside the “typical” retirement plan box. It is critical that the program be composed of one or more qualified retirement plans.

Under U.S. tax law, a qualified plan offers a tax deferral benefit that is not available in other arrangements. In general terms, an employer can contribute money to a qualified plan, take an immediate tax deduction for the contribution and no one pays tax on the contribution (or the related investment earnings) until the money is distributed to the plan participant. This tax deferral is even more powerful when the employer is a tax pass-through entity, such as a partnership, S-corporation, or Professional Service Corporation (PSC) where earnings are taxed at an owner’s personal tax level. The tradeoff for this significant tax advantage is a plethora of complex regulations that govern whom the plan covers, how much the covered individuals can contribute to the plan and how much they can receive from the plan.

While a 401(k) plan will serve as the foundation, a stand-alone 401(k) plan may not achieve all of an employer’s retirement plan goals. However, Internal Revenue Service (IRS) regulations permit groups of highly paid professionals to convert or establish a next-generation cash balance plan to use in conjunction with a 401(k) plan. This approach may allow for significantly more tax-deductible contributions than can be made through a 401(k) plan alone.

Comparing cash balance and 401(k) plans

Qualified retirement plans are divided into two basic camps: Defined Benefit (DB) plans and Defined Contribution (DC) plans. Cash balance plans are the most common DB design among professional firms, while 401(k) plans are the most common DC plan design.

Cash balance plans are often referred to as hybrid retirement plans. A cash balance plan is structured to look like a DC plan with each participant having a notional account to which employer contributions and interest credits are added. It is important to note, however, that the actual investment return of the underlying assets in a cash balance plan can differ from the interest credits added to participants’ accounts. Additionally, participants can elect annuity distributions from the plan. Because the employer assumes the risks for investment performance and participant longevity, by definition, the cash balance plan is a DB plan. As a DB plan, tax law limits the benefits that can accrue to the participant (as an annuity) rather than limiting the contributions allocated to the participant’s notional account.

Dollars in

Highly paid professionals can build a significant retirement account through a 401(k) plan. They have the personal flexibility to defer individually up to $24,500 annually, plus $8,000 in catch-up contributions if they are age 50 or older, for a total of $32,500 (based on limits in effect for 2026). A substantial percentage of the combined (employee and employer) $72,000 annual limit ($80,000 including the catch-up contribution) is the professional’s personal decision to save, while the remainder is group discretionary ( i.e., the professional group can make the decision each year to contribute, but once the group decides, generally all participating employees of the group must share in the contribution).  For late career professionals with substantial savings needs, this annual limit may be inadequate to meet their savings goals.

Cash balance plan pay credits appear as contributions in a participant’s account statement and can be far greater than the $72,000/$80,000 combined DC contribution limit. The plan can be designed so that individual participant pay credits may vary, but the pay credit formula is defined within the plan document and is not discretionary. Contributions are required each year by the group, and each participating professional must share in those contributions.

Dollars invested

Most 401(k) plans give the plan participant the ability to personally decide how his or her account is invested, whether in a target date fund, allocated  among funds in the plan’s fund lineup, or fully directed through a self-directed brokerage window. It is at this point that the fundamental   character of the cash balance plan as a defined benefit plan begins to reveal itself. Trust assets are invested as a pool and there is no individual investment control and direction. It is now possible for the participants’ cash balance accounts to reflect the actual performance of the portfolio, which allows the employer to mitigate the investment risk that is typically inherent in DB plans; however, participants’ accounts are not allowed to fall below the accumulated amount of the pay credits defined by the plan.

Dollars out

Within the 401(k) plan, the money is available for distribution for hardship, at age 59½, and at retirement. Lump-sum distributions can be rolled to an Individual Retirement Account (IRA), if desired. Loans are also available and are a common feature. Within the cash balance plan, in-service distributions are also available at age 59½ or after age 62, at retirement, or upon termination if vested. Loans can also be made available under the plan but are not a common feature.

However, conditions are changing. The Federal Reserve cut rates three times in 2025 and signaled further reductions, which will directly pressure annuity pricing and lower guaranteed payouts. As insurers earn less on their investments, they will reduce crediting rates and lifetime income guarantees, making today’s rates a fleeting advantage.

Common features

Since both 401(k) and cash balance plans are types of qualified plans, they share a number of common features that are important for employers and participants:

• Contributions made to 401(k) plans and cash balance plans are tax-deductible
• Trust earnings for both plans are tax-deferred
• Trust assets for both plans are protected from the claims of creditors
• If lump-sum distributions are made, both plans provide the ability to roll the distribution to a successor plan or an IRA
• Distributions from either plan are not subject to FICA or FUTA tax

Who bears retirement risks within each plan? 

A fundamental difference between the 401(k) and DB plans is the responsibility for retirement risks such as the rate of return on plan investments and the lifespan of the plan participants.  For DB plans where benefits are generally paid as a monthly annuity, these risks are the responsibility of the employer; for DC plans, the employee bears all risks while their account balance accumulates prior to retirement. Under DB or DC plans, if benefits are distributed as a lumpsum, the employee bears these risks in retirement. DB and DC plans each have their own set of limits and testing requirements. As the names suggest, the ultimate amount of retirement benefits provided is the basis for DB plan limits and testing, while the amount of contributions added to participant accounts during a year is the basis for DC plan limits and testing.

These differences in how limits are set — and how nondiscrimination testing is performed — provide design opportunities, particularly for professional firms. The reason for this is that the age of the participant plays a role in DB plans but is not a factor in DC plans. The table shows the amount of monthly retirement income, commencing at age 65, which can be attributed to a single $10,000 contribution made at various ages. Therefore, when testing for benefit limits and discrimination, an identical contribution is considered to have over three times greater value to a 35-year-old than to a 55-year-old.

Case Study: Three partners in the enterprise

This case study uses a hypothetical professional firm, Washington, Adams & Jefferson (WA&J), to illustrate current plan design considerations.

Washington, Adams & Jefferson is a partnership and could be any group of professionals (e.g., accountants, doctors, lawyers, etc.). The three named individuals are the only partners in the enterprise, each owning one-third of the practice. The firm has a number of Associates, who may or may not be on a track to become partners in the firm. There are also Paraprofessionals and Staff positions. The partners in WA&J have two leading goals for a retirement program:

	Maintain equity among the partners — that is, no partner wants to subsidize the retirement benefit of the other partners
	Accommodate the retirement savings (and tax deferral) objectives of the partners and satisfy the firm’s objectives for providing different levels of retirement benefits to the various categories of employees

Tax law restrictions typically stand in the way of fully satisfying these two goals, but by working through various required discrimination tests, a plan design that accomplishes a majority of the objectives can be achieved.

Before selecting an appropriate retirement program design, we must understand WA&J’s objectives for its different employee groups and the basic nondiscrimination requirements that apply to qualified plans.

The circumstances of, and objectives for, the four employee classifications are as follows:

	Partners – Washington (age 60) and Adams (age 55) would like to maximize their retirement savings but within the constraint of maintaining equity between the partners. Jefferson (age 45) already has significant real estate holdings and is less inclined to save for retirement.
	Associates – the Associates range in age from 30 to 45. WA&J’s perspective is Associates are primarily interested in current compensation vs. retirement benefits. The partners believe their Associates are reasonably paid and fairly mobile, and the objective is to minimize retirement plan contributions to this group.
	Paraprofessionals – these employees range in age from early 20s to mid-50s. WA&J places great emphasis on hiring and retaining strong individuals in this category and wants to provide a significant retirement benefit to this group.
	Staff – relatively young, the firm is comfortable with a 20% staff turnover rate. WA&J recognizes the need to offer a market-competitive level of retirement benefits to attract Staff employees.

WA&J could provide a 401(k) plan with a simple match and perhaps an additional profit sharing contribution which would maintain perfect equity among the founding partners. However, the DC plan limits will keep the three partners from deferring as much money into a retirement program as they would like and nondiscrimination testing may restrict their ability to earmark contributions to certain classes of employees. By adding a cash balance plan, the firm will overcome these obstacles and meet its retirement program objectives.

Cash Balance Plans

While a cash balance plan cannot eliminate all partner equity concerns, legislation adopted in 2006 significantly reduced related risks. Interest credits can closely track plan investment returns, mitigating investment risk, while termination benefits may equal the notional account balance at any age. Longevity risk remains, though most participants historically elect lump-sum payments rather than annuities.

Increased contribution amounts, especially for older individuals Ability to provide different levels of benefits by employment category and maintain contribution Consistency within a category (as long as nondiscrimination tests are satisfied) Gains and losses are minimized resulting in greater equity among partners Relatively easy for employees to understand

Additional administrative costs, associated with a second plan, including a required actuarial certification More difficult to fully maximize contributions than in a traditional DB plan PBGC premium expense in some situations; however, PBGC coverage can result in additional deductible contributions Investment risk can be minimized but not eliminated Funding levels must be monitored to avoid  certain benefit restrictions

The following tables demonstrate the employer contributions provided under the combination of 401(k) and cash balance plans established by WA&J. Each participant is also eligible to make salary deferral contributions up to the limits placed on those contributions (including additional catch-up contributions for individuals age 50 and over) in the 401(k) plan.

Plan design notes: The examples described in the above tables assume that WA&J sponsors two 401(k) plans, one safe harbor 401(k) plan that uses a 3% qualified nonelective contribution to satisfy the safe harbor requirements, plus an additional 2% to satisfy WA&J’s top-heavy contribution requirements for the combination of their 401(k) and cash balance plan. This 401(k) plan covers all non-Associate eligible employees: Partners, Paraprofessionals and Staff. Associates are covered by a separate 401(k) plan that allows them to make employee 401(k) deferrals; no employer contributions are provided. Each plan defines plan compensation using a 415 definition of compensation.

WA&J also implements a cash balance plan covering the Partners, Paraprofessionals and Staff. The cash balance plan design shown requires a nondiscrimination testing technique known as cross-testing, where contributions and pay credits are converted to their equivalent benefits at a future retirement age, in this example age 65. The nondiscrimination testing requires that non highly compensated employees receive a minimum contribution gateway amount in addition to providing comparable equivalent benefits. In this example, we are assuming that the lowest contribution rate (the 9% total employer contribution for Staff) divided between the 401(k) and cash balance plans, is sufficient to meet the gateway minimum contribution requirements. Finally, we are assuming that these plans pass all other coverage, nondiscrimination, and minimum participation testing.

How well does this retirement program accomplish WA&J’s objectives? 

Partners – The primary objective is to maintain full equity so no partner will have to subsidize the benefit of another. Assuming that all three partners elect a lump-sum benefit from the cash balance plan, this objective is fully satisfied. In addition, Washington and Adams are able to receive contributions of (and defer tax on) approximately $158,500 each year. Jefferson accomplishes his goal by having a meaningful, but significantly lower contribution amount of $71,300 per year with flexibility to contribute more or less through the 401(k) plan.	Associates – WA&J wants to minimize the contributions to the Associates while maintaining safe  harbor 401(k) status for all Partners, Paraprofessionals, and Staff. This is accomplished by providing a separate, employee deferral only 401(k) plan for Associates and excluding the Associates from participating in the cash balance plan.	Paraprofessionals and Staff – WA&J wants to offer a strong benefit to this group in order to attract and retain individuals in this category. The plan design provides employer contributions of 12% of pay for Paraprofessionals and 9% of pay for Staff, plus employee 401(k) salary deferrals and catch-up contributions if they are at least age 50.

Putting a combined plan design to work for your firm

A thoughtfully designed combination of a 401(k) plan and a cash balance plan can significantly enhance retirement outcomes for partners, paraprofessionals and staff by allowing substantially higher contributions for key individuals than a standalone 401(k) plan permits. Establishing a separate plan for associates is a common and effective strategy for improving overall cost efficiency while preserving equity across employee groups. Together, these plans create a retirement program that is straightforward to communicate, flexible to administer and powerful in its ability to drive long term accumulation.