A soft first quarter, and what the pension can still flex

The first quarter of 2026 is not over, and for some practices it is already soft. Collections slipped. A referral source went quiet. A large case did not close. On February 15, the temptation is to treat the cash balance plan as if it were a profit-sharing election you can simply skip. It is not. A cash balance plan can flex, and the flex is narrower than a bad month feels. It can flex inside the formula you already adopted, or by a prospective amendment made before the accrual you want to avoid, with notice when notice is required. It cannot reach backward and cancel a benefit that has accrued. It cannot make the minimum funding obligation optional. And it cannot turn a business disappointment and an investment loss into one problem with one switch.

Sterling Pension Group is a third-party administrator. We are not an actuarial firm. An independent Enrolled Actuary measures the minimum contribution and the deductible maximum. This briefing is not tax, legal, or actuarial advice. It is a description of the levers that still move in the middle of February, and of the levers that do not, so a soft quarter does not become a prohibited transaction or an unpaid minimum.

Two different bad quarters

Separate the operating result from the trust's investment result. They often arrive together, and they are not the same fact. The hypothetical account is credited with the plan's interest crediting rate whether or not the business had a good month and whether or not the portfolio cooperated. If the document says the credit is a fixed rate, or a rate tied to an index, that credit accrues on the hypothetical balance. The employer stands behind it. A down market in the trust does not reduce the hypothetical credit. It can increase the contribution the actuary will eventually require, because the assets fell while the benefit promise did not. A strong market can do the opposite. You do not get to keep a surprise gain as a personal refund.

A soft operating quarter is about the employer's ability to pay, and sometimes about compensation itself. If your W-2 or your earned income is going to be lower than the figure the illustration used, the formula may produce a smaller credit because the credit is a function of pay. The 2026 compensation cap is $360,000. That cap is a ceiling. It is not the salary the plan assumes you will take. An owner who expected to count $360,000 and now expects $200,000 does not have a $360,000 plan year, no matter what a January illustration said. Tell the actuary the revised pay estimate early. Waiting until December to mention it does not preserve a higher credit you did not earn, and it can leave quarterly funding or estimated taxes pointed at the wrong number.

An illustrative contribution from January is the first document to demote. If someone showed you a neighborhood figure — including the age comparison that put an owner near $190,000 or $320,000 under a stack of assumptions — that figure was illustrative. A soft quarter does not amend it, because it was never a promise. A certified range, if you have one, is the document to reread. The range may already contain the flexibility you want. If it does not, the conversation is an amendment conversation, and amendments have a clock.

What can still be changed

Read the formula before you announce a reduction. Some cash balance documents define the pay credit as a range, or as a percentage the employer declares each year between a floor and a ceiling, or as a schedule by group that the administrator applies to actual pay. Inside a written range, choosing a lower credit can be an ordinary annual decision, if the declaration is made the way the document requires and if the choice does not cut a benefit that has already accrued. The actuary then values what you actually declared. That is real flexibility. It is also easy to overstate. A range of "zero to the maximum" is not a feature every document has. Some formulas are a fixed percentage of pay. A fixed percentage moves only because pay moved, unless you amend it.

An amendment that reduces future accruals has to be adopted before those accruals are earned, and it cannot reduce the benefit already accrued. If the reduction is significant, ERISA section 204(h) generally requires advance notice to affected participants. For a small plan the notice period is often 15 days before the effective date. Notice that goes out on the day you wish the reduction had started is late. On February 15, a prospective reduction that is effective for future months of 2026 may still be available if you start now, the document permits the change, and notice goes out in time. A reduction that you want to apply to January and the first half of February is probably a request to cut something already earned. Expect the answer to be no.

Freezing a plan, so that pay credits stop prospectively while the hypothetical balances remain and continue to receive interest credits, is a form of amendment with the same timing discipline. A freeze is not a termination. It does not send the money back to the employer. It does not stop the interest credit. It does not, by itself, satisfy minimum funding for the benefit already on the books. It can be the right response to a practice that cannot keep granting large credits. It is a poor response to a single soft month that you have not yet described to the actuary. The plan lifecycle includes freezes and amendments because they are ordinary tools. They are not emergency exits.

Compensation changes, done as real compensation, are the cleanest flex. Reduce a bonus that has not been declared. Adjust a draw that was never wages. Do not recast money already paid. An S corporation that cuts a shareholder's remaining salary should do it with the CPA, because reasonable compensation, payroll taxes, and the pension formula all move together. A partnership's earned income will not be known until the year is closed; a February estimate is still worth giving the actuary, marked as an estimate. Publication 560 is the public vocabulary for those compensation words. The CPA's conclusion controls the return. The actuary's conclusion controls the schedule.

The 401(k) side can flex differently, and you should not assume the pension rules apply to it or the reverse. An elective deferral is your election, and you can often change it prospectively for pay not yet earned, within the plan's procedures. Stopping a deferral does not stop a cash balance credit. A safe harbor contribution, if you are required to make one, is not discretionary in the way a year-end profit-sharing amount sometimes is. Match follows the formula and the deferrals that were actually made. A nonelective safe harbor is a percentage of pay the amendment promised. Missing it because the quarter was soft is a qualification problem, not a cash-management choice. The combo, if you have one, has to be adjusted on both documents. One phone call that says "pause retirement" will be heard differently by the recordkeeper and by the pension actuary. Make the two calls, or make one call to a coordinator who will not blend them.

What cannot flex

The accrued benefit cannot be cut. That is the anti-cutback rule, and it is not waived for a bad quarter, a bad year, or a sincere cash-flow problem. If January's pay credit accrued under the formula in effect in January, it accrued. Interest credits that the document grants on existing balances continue. Participants who have a balance, including staff, keep it. A design that covered employees cannot be quietly rewritten in February so that only the owner was ever a participant.

Minimum funding cannot be skipped because revenue disappointed you. For a calendar-year defined benefit plan, the minimum required contribution is generally due 8.5 months after year-end, September 15 of the following year. For the 2025 plan year, that date is September 15, 2026, which is still ahead of you and is not erased by a weak 2026 quarter. For the 2026 plan year, the minimum will have its own due date next year. Some plans also owe quarterly installments when there is a funding shortfall. The Enrolled Actuary is the person who says whether a quarterly is due. If you do not know, ask this month. The excise tax on an unpaid minimum starts at 10 percent and is not the whole story if the shortfall remains uncorrected. An extension of the income-tax return does not extend minimum funding. Those are different statutes. The deadline calendar should show both.

Money contributed to the trust is not casually refundable if you later decide you contributed too much. Defined benefit contributions are not IRA contributions. You do not recharacterize them. A reversion to the employer can be prohibited or can carry an excise tax. Taking the money back because the quarter softened is a good way to create a problem larger than the cash you wanted. If a January deposit now looks high relative to a revised pay estimate, tell the actuary and the CPA. Do not reverse the wire. There are narrow correction paths for contributions made by mistake. "I changed my mind after a slow February" is not the name of one of them.

The statutory limits do not flex downward in a soft year, and they do not have to. The 2026 deferral limit remains $24,500. The ordinary catch-up remains $8,000. Ages 60 through 63 remain $11,250. The annual-additions limit remains $72,000. The benefit limit remains $290,000, which was never a required deposit. The compensation cap remains $360,000 as a ceiling. Those figures, from IR-2025-111 and the COLA page, are maximums you are allowed to use if the plan and the pay support them. A soft quarter does not lower the maximums, and it does not oblige you to hit them. Roth catch-up treatment for participants with 2025 FICA wages over $150,000 also does not pause. If you are still deferring catch-up dollars, they still have to be Roth when the wage test says so. Reducing a deferral election prospectively is allowed. Character-flipping a catch-up back to pre-tax is not.

Laying off staff to make the pension cheaper is not a flex you should use. A significant reduction in participants can be a partial termination. The usual facts-and-circumstances marker practitioners watch is around 20 percent of participants, and the IRS looks at the facts rather than at a single ratio. A partial termination vests the affected people in the benefits they have. It does not erase them from the year if they already earned a credit. It can also make the next coverage test look different from the test you wanted. If headcount dropped for real business reasons, report the names and the dates so the census is honest. If headcount dropped because someone said the plan would "work better" without them, stop and get advice before you go further. The staff cost of a lawful design is a cost. Avoiding it by clearing the roster is not a technique this firm will help you dress up as administration.

PBGC coverage does not flicker off in a soft quarter. A covered plan still owes the premium rules that apply to it. An exempt plan is exempt because of a statutory category, not because cash is tight. The categories are plan-specific, and the coverage guidance is the reference. A distress termination is a formal, uncommon process for a plan that truly cannot continue. It is not the label for a disappointing February. Do not use the word with a participant, a banker, or a CPA until an adviser who handles terminations has looked at the funded status.

How to talk about it this month

Call while a prospective amendment can still be prospective. Bring the document's contribution language, not a paraphrase. Bring cash-flow expectations for the rest of the year, in a range, and a revised compensation estimate. Bring the trust's investment result as a separate number. Bring the census changes, if any, with dates. Ask three questions. Is there a range we can declare inside the existing formula. If we need an amendment, what is the earliest effective date that does not cut an accrual, and when must 204(h) notice go out. What is the minimum funding picture for 2025, which is already on the clock, as distinct from the 2026 credit we are trying to slow down.

Ask the 401(k) provider a different set of questions. Can deferrals be reduced on the next payroll. Is any safe harbor or match formula still obligatory. Will a lower owner deferral change a test. Do not accept "we paused the match" from a well-meaning office manager who does not have the adoption agreement. Administration is the record of which change was actually adopted. A verbal pause will not be in that record.

The defined benefit limit of $290,000 remains a benefit ceiling, described on the IRS limits page. You are not failing the plan by funding less than an illustration that pointed at that ceiling. You may be failing the plan by funding less than the minimum the actuary calculates for the benefit you have already promised. Those are the only two pension numbers that matter this month, and they are not the same number. The Department of Labor's Form 5500 guidance will matter when the year is reported. It does not give you a February waiver. The IRS Form 5500 corner is the same subject from the Service's side. Neither page contains a soft-quarter exception.

If the honest conclusion is that the plan should not have been opened at this size, or at all, say that while the amendment window for future 2026 accruals is still useful. A plan that is a poor fit in a normal year is a worse fit in a soft one. The notes on when it is not a fit are easier to act on in February than in December, after a full year of credits has accrued. Freezing prospectively, or adopting at a lower credit for a future year, is a legitimate outcome of this conversation. Pretending the credits were never granted is not.

What to do in the next two weeks

Write a short brief: revised compensation range for 2026, cash you can actually contribute without harming payroll, the trust's year-to-date investment result, and any employee who joined or left. Pull the pages of the adoption agreement that state the pay credit. Do not reverse any deposit. Do not cut a staff member to improve a test. Do not stop an obligatory safe harbor or a required minimum and call it a pause.

Ask the enrolled actuary, through the administrator, whether a lower declaration or a prospective amendment is still timely, and what notice date applies. Ask, in the same week, what the 2025 minimum funding number currently looks like, so a soft 2026 quarter is not used as an excuse to ignore a 2025 obligation due September 15. Send the brief rather than a sentence that says the pension should probably wait. Two weeks from today is March 1. By then, many 2025 deductions will still be open if the return is extended. That is a different clock from the one that governs this year's accrual. Do not solve the wrong clock.