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Pension Deductions Announces Educational Resource Explaining How Cash Balance Plans Work for Doctors and Dentists

Physicians and dentists often reach their highest earning years later than professionals in many other fields. Years spent in education, residency, specialization and practice development can leave a shorter period in which to build retirement savings. Once income rises, the annual limits of a conventional 401(k) may also feel restrictive. A cash balance plan allows a medical or dental practice to establish a pension benefit in addition to its existing 401(k) or profit-sharing plan. It can create substantially greater retirement contributions, but it also involves funding commitments, employee considerations and ongoing actuarial administration. What Is a Cash Balance Plan? The IRS defines a cash balance plan as a type of defined benefit plan that expresses each participant’s benefit through a hypothetical account. Although the account format resembles a 401(k), the legal and funding structure is different. Each year, the plan usually provides a pay credit, stated as a dollar amount or percentage of compensation, and an interest credit based on the rate or index specified in the plan document. These credits determine the participant’s promised benefit. The actual assets are invested in a pooled trust, and the employer is responsible for funding the benefits. Why These Plans Can Suit Medical and Dental Professionals Cash balance plans can be particularly relevant to physicians and dentists who own a practice, receive substantial self-employment income or earn 1099 income outside regular employment. Many healthcare professionals have high and consistent earnings but may have started serious retirement saving later because of training costs, student debt or the expense of establishing a practice. Because defined benefit calculations consider age, compensation and years remaining until retirement, an older practice owner can often support a larger contribution than a younger owner with the same income. A sole proprietorship, partnership, S corporation, C corporation or professional entity may sponsor the plan. Compensation is determined differently for each structure. An S corporation owner generally relies on eligible W-2 compensation, while a sole proprietor or partner uses earned income calculated under applicable tax rules. The design should therefore be coordinated with the practice’s CPA and pension professionals. How Are Contributions Calculated? Unlike a 401(k), a cash balance plan does not have one standard contribution limit for everyone. An actuary calculates the contribution using the benefit formula, participant ages, compensation, prior benefits, interest assumptions and funding status. For 2026, the IRS defined benefit limit generally caps the annual retirement benefit at the lesser of 100% of the participant’s highest three-year average compensation or $290,000. This is a benefit limit, not a flat annual contribution limit. The contribution needed to fund it may therefore vary significantly among practitioners. A doctor or dentist in their late 50s with stable high compensation may be able to make a six-figure annual contribution. A younger practitioner may still benefit, but the permissible contribution is generally lower because there is more time to accumulate the promised benefit. Pension Deductions offers an online Cash Balance Plan Calculator that provides an initial estimate based on age and compensation. The result is intended for preliminary planning and does not replace a formal actuarial calculation or review of the practice’s employee census. Questions about the assumptions may be directed to [email protected] . Combining a Cash Balance Plan With a 401(k) A practice can generally maintain a cash balance plan alongside a 401(k) and profit-sharing plan. The 401(k) allows salary deferrals and may include employer contributions. The cash balance plan is employer-funded and designed to provide a specified retirement benefit. When coordinated properly, the combination can allow owners to save more while continuing to provide benefits to employees. However, contributions, eligibility provisions and employee benefits must comply with applicable coverage and nondiscrimination rules. What Happens When the Practice Has Employees? A cash balance plan is not limited to the owners. Eligible employees generally must be considered, including clinical and administrative staff. The design can sometimes provide different benefit levels for defined employee groups, but the overall arrangement must pass required testing. Before preparing an illustration, the plan professional will usually request an employee census showing ages, dates of hire, compensation, ownership and employment status. Employee benefit costs can materially affect whether the plan is practical. Tax Treatment and Distributions Employer contributions are generally deductible when made in accordance with the plan and applicable tax rules, and investment earnings accumulate tax-deferred. Participants are generally taxed when benefits are distributed, although an eligible lump-sum distribution may often be rolled into an IRA or another qualified plan. The deduction should not be the sole reason for adoption. A cash balance plan is intended to provide meaningful retirement benefits, not an annual deduction that can simply be turned on and off. Ongoing Responsibilities and Risks Cash balance plans require annual actuarial valuations, contribution calculations, participant reporting and government filings. The employer must also monitor investments in relation to the plan’s liabilities. If investment returns are lower than expected, the employer may need to contribute more. If returns are higher, future contributions may be reduced. Contributions can sometimes be managed within a range, and formulas may be amended prospectively, but changes require careful planning. A business with unpredictable income or limited cash reserves may find the commitment difficult. Estimating Whether a Plan May Be Appropriate A cash balance plan is often worth evaluating when a doctor or dentist has stable practice income, is already maximizing other retirement options, wants to accelerate retirement funding and is comfortable providing required employee benefits. A Long-Term Retirement Planning Decision For the right medical or dental practice, a cash balance plan can provide a disciplined way to build retirement assets during peak earning years. Before proceeding, practitioners should evaluate contribution affordability, employee costs, business structure and long-term objectives with their CPA, financial adviser, actuary and plan administrator. A properly designed plan can be a valuable component of retirement planning, but the decision should begin with a realistic assessment of its opportunities and obligations.