Why most owner plans are a 401(k) plus a cash balance, not a pension alone

An owner who asks for "a pension" is often asking for two different tax-favored deposits that the law refuses to treat as one bucket. The first is an employee deferral, and if age allows it a catch-up, inside a 401(k). The second is an employer credit inside a cash balance plan, sized by an enrolled actuary rather than by a published contribution cap. Most durable owner designs are a pair. A pension with no 401(k) leaves the deferral unused. A 401(k) with no pension stops at the defined contribution ceiling. The pair is not a marketing bundle. It is what remains after you take the census, the deduction rules, and the payroll calendar seriously.

Sterling Pension Group LLC in West Hartford administers arrangements like this and coordinates the independent Enrolled Actuaries who certify the cash balance side. We are not an actuarial firm. This briefing is education for a physician, a dentist, an attorney, a consultant, or another self-employed owner. It is not tax, legal, or actuarial advice. The structural page is the 401(k) and cash balance combination.

The 2024 numbers, kept in their own boxes

Notice 2023-75 is still the only released table. The IRS has not published 2025 limits, so a design for the 2024 year uses 2024 figures only. The employee deferral limit is $23,000. The catch-up for a participant age 50 or older is $7,500. The defined contribution annual additions limit is $69,000. Compensation counted by the plan is capped at $345,000. The defined benefit annual benefit limit is $275,000. The IRA limit is $7,000, which is a personal account and not a third piece of the employer plan. The IRS table lives on the COLA page. The benefit limit, which owners keep trying to add to the $69,000 as if both were deposits, is explained on the IRS page for defined benefit plan benefit limits.

Read those boxes separately. The $23,000 and the $7,500 are deferrals from pay. Catch-up deferrals generally do not count against the $69,000 annual additions limit. Employer profit sharing and other employer defined contribution amounts do count against it, together with the non-catch-up deferral. The cash balance credit sits outside that defined contribution limit because it is a defined benefit promise. It is not capped at $275,000 of deposit. The $275,000 figure caps the annual benefit. The credit that funds a benefit under that ceiling is actuarial. Any owner dollar figure in a proposal is illustrative until the enrolled actuary values the actual formula, assets, and census. Adding $69,000 to $275,000 and calling the sum your room is arithmetic, not law.

Publication 560 walks through small-employer plan types one at a time. Use it to see why a defined contribution plan and a defined benefit plan are different instruments. Use your CPA to see how the deductions interact when you sponsor both.

What the 401(k) is doing in the pair

The 401(k) does three jobs a cash balance plan does poorly.

It takes a deferral from payroll while the year is still open. That is a use-it-or-lose-it clock. The SECURE Act generally allows a new plan document to be adopted as late as the filing deadline, including extensions. Employee deferrals generally cannot be elected retroactively against wages already paid. If October is ending and you have not told payroll to withhold, the $23,000 is already shrinking to whatever the remaining checks can carry. A cash balance plan adopted later does not restore the missed deferral. This is why the design window note, /insights/year-end-window, insists on September attention even though some pension paperwork can legally follow.

It gives staff a defined contribution benefit that is often easier to communicate than a slice of a pension. In a practice with hygienists, associates, or clinical staff, the profit-sharing piece is frequently the benefit that lets the owner's cash balance credit survive nondiscrimination testing. That is not automatic. It is a result the actuary tests against the real census. The census briefing is /insights/census-first. The cost of getting the test to pass is discussed on the staff cost page. If you will not pay that cost, the pair is not a fit, and a pension alone is not a clever alternative. A pension alone can be worse, because you have removed the defined contribution tool that testing often needs.

It holds the catch-up. The $7,500 age-50 catch-up is a 401(k) feature. It is not a cash balance limit and it does not increase the defined benefit ceiling. Notice 2023-62 delayed the SECURE 2.0 rule that would force certain catch-ups to be Roth. That mandate is not in force in 2024, and it is not in force for 2025 either. It is scheduled to operate beginning January 1, 2026, for participants whose prior-year FICA wages exceeded $150,000. When it arrives, it will change the tax character of the catch-up inside the 401(k). It will not rewrite the cash balance formula. Owners who are being told to adopt a Roth cash balance feature because of that rule are being told something the rule does not say.

What the cash balance plan is doing in the pair

The cash balance plan holds the larger employer credit, when the actuary can support one. The hypothetical account is a pay credit plus an interest credit. The interest credit is a plan term, not last quarter's investment return. The sponsor stands behind it. For a solo consultant the credit may be the whole point of the arrangement, and the 401(k) is there so the deferral is not left on the table. For a dental or medical practice the credit is the owner's benefit, constrained by what a tested staff benefit costs. Either way, the cash balance plan is not a surplus bucket you fill after you "max the 401(k)." The two plans are designed together because the deduction rules and the nondiscrimination rules read them together.

A traditional defined benefit formula can occupy the pension seat instead of a cash balance formula. The comparison is /insights/db-versus-cash-balance. Owners usually choose cash balance in the pair because the statement is readable. Readability does not change the funding obligation.

How the deductions talk to each other

When one employer maintains both a defined benefit plan and a defined contribution plan, the deduction limits coordinate. Elective deferrals are generally deductible without being crammed into the same percentage-of-pay ceiling that constrains employer profit sharing. Employer contributions to the defined contribution plan, other than those deferrals, can affect how much of the pension contribution is deductible, and the pension can affect how much profit sharing is deductible. There is a statutory path on which a modest defined contribution employer contribution does not reduce the pension deduction. The compensation it uses is plan compensation, already limited by the $345,000 cap. The details are your CPA's to apply to your entities, with the enrolled actuary's contribution range in hand.

Do not simplify this into "put six figures in the pension and twenty-five percent in the 401(k) and both are fully deductible." That sentence skips the coordination rule, skips who is a beneficiary, and skips the difference between a minimum-funding contribution and a contribution you merely wish to deduct. IRC 404(a)(6) often permits a deposit by the return due date, including extensions, to be treated as deducted on that return. Separately, minimum funding for a calendar-year defined benefit plan is generally due September 15 of the following year, 8.5 months after year-end. Miss the minimum and the excise tax on Form 5330 can be 10%. Those dates are not substitutes. A combo does not merge them into one deadline.

If your CPA cannot yet say which deposits are employer profit sharing and which are deferrals, you are not ready to wire the pair. Labeling a deposit after the fact is how deduction problems start.

Payroll, documents, and the order of operations

A workable October sequence looks like this. Freeze the census, including related employers. Decide whether 2024 deferrals are still arithmetically possible on the remaining checks. If they are, adopt or amend the 401(k) in time for payroll to withhold, up to $23,000 and, where age 50 applies, $7,500. In parallel, ask the enrolled actuary for an illustrative cash balance range that assumes the profit-sharing level your CPA thinks the coordination rule can live with. Then, and only then, talk about documents.

Sterling can coordinate the document set and the census. The actuary signs the valuation work, including Schedule SB when the plan year calls for it. Your CPA signs the return. None of those roles is optional because the brochure said "combo." The ongoing work, after signatures, is the plan lifecycle: trust accounting, a valuation cycle, and a Form 5500 on EFAST2. A calendar-year filing is generally due July 31, extendable to October 15 on Form 5558. The IRS describes the filing in the Form 5500 corner. Budget the professional cost on the fees page before you fall in love with the combined deduction.

PBGC coverage is decided for the defined benefit plan, not for the 401(k). Many small professional-service employers are exempt. Many small plans are not. Adding a 401(k) does not create an exemption, and being an owner-only sponsor does not answer the question by itself. Coverage guidance is on the PBGC site. Ask counsel with the actual entities in view.

Who should not force a pair into existence

Do not add a cash balance plan to a healthy 401(k) if the only reason is a peer's deduction and your profit is not durable. The 401(k) can continue alone, inside the $69,000 additions limit and the deferral limits, and it can be skipped or reduced in a bad year in ways a pension cannot. Do not add a 401(k) to a pension in December solely to chase a deferral the remaining payroll cannot withhold. A partial deferral year is allowed. A fictional deferral year is not.

Do not use the pair to hide staff. The combination is often better for testing than a pension alone, and "often" is not "always." If the illustrations only work when the census is edited, discard the illustration. The calculator is a teaching aid with the same limit. The comparison among SEP, 401(k), and pension designs is the right page if you are still unsure you need the pension leg at all.

Owners sometimes inherit an old profit-sharing plan and want the cash balance plan "on the side." Side by side is still a combination, with one deduction coordination and one controlled-group census. Tell the actuary about the old plan on the first call. A forgotten profit-sharing account is a common reason an illustrative credit has to be rebuilt.

What "most owner plans" does not mean

"Most" is a description of designs that survive testing and payroll, not a recommendation that you must have both. A one-person traditional defined benefit plan, with no deferrals desired, can be the right instrument. A 401(k) alone can be the right instrument in a year you are paying debt or preparing to sell. The claim in the title is narrower. When an owner of 40 to 65, with stable profit and a real census, wants both the deferral and a pension-sized credit, the ordinary answer is the pair. It is ordinary because each piece has a job the other piece is legally bad at.

If you are looking at that ordinary answer in the last week of October, you still have time to do it properly, and you do not have time to do it casually. Remaining payrolls are visible. The actuary can still be engaged for an illustrative range before anyone pretends the range is final. The document can be explained to you before you sign it. None of that requires a 2025 limit, because 2025 limits are not out, and none of it requires a Roth catch-up decision, because that mandate is delayed.

What to do in the next two weeks

Put the two plans on one page before you adopt either new piece.

• Ask payroll for the remaining 2024 pay dates and the most that can still be deferred. Compare that figure with $23,000, plus $7,500 if you are age 50 or older. Accept the gap if the year is partly gone.
• List existing plans, including any SEP, SIMPLE, or old profit-sharing plan, and send the list to your CPA with the entity chart.
• Ask for one combined illustrative sketch: deferral, employer defined contribution, and cash balance credit, each labeled, with staff cost shown in dollars. Reject any sketch that adds $275,000 to $69,000 and calls the total a limit.
• Have your CPA say, even preliminarily, whether the employer defined contribution piece is small enough to sit comfortably beside the pension deduction. Do not wire either deposit this week.
• Read the cash balance page beside the combo page so the pension leg is clear before the pair makes it look like an account balance.

Then contact Sterling Pension Group with the census and the payroll calendar. Ask for a coordinated design. Do not ask for a single blended maximum.