Traditional defined benefit versus cash balance for a solo owner in 2024

A solo owner who has outgrown a SEP or a straight 401(k) is usually offered two pensions that are easy to confuse. One is a traditional defined benefit plan. The other is a cash balance plan. Both are defined benefit plans. Both require an enrolled actuary. Both can create a deductible employer contribution far larger than the defined contribution annual additions limit, and neither contribution is a number the IRS prints in a table. The choice is about the shape of the promise, not about which label sounds more modern.

This note is for a self-employed consultant, a physician, a dentist, or an attorney with little or no staff, looking at the 2024 year while there is still time to design rather than to improvise. Sterling Pension Group LLC in West Hartford administers plans and coordinates independent Enrolled Actuaries. We are not an actuarial firm. Nothing here is tax, legal, or actuarial advice. The structural pages are traditional defined benefit and cash balance. The fall timing note is /insights/year-end-window.

The 2024 ceilings both plans share

Notice 2023-75 set the 2024 figures that both designs have to respect. The defined benefit annual benefit limit is $275,000. Countable compensation is capped at $345,000. If a 401(k) is paired with either pension, the deferral limit is $23,000, the age-50 catch-up is $7,500, and the defined contribution annual additions limit is $69,000. The IRA limit is $7,000, and an IRA is not a substitute for either plan. The IRS has not published 2025 limits. Do not compare these two pensions using a limit you expect to read about in November. The official table, when it changes, is the COLA page. How the benefit limit works in plain language is on the IRS page for defined benefit plan benefit limits.

The $275,000 limit is a cap on the annual benefit that can be paid, generally expressed as a life annuity starting at a retirement age the law recognizes. It is reduced in specified ways when benefits start early or when participation has been short. It is not a cash deposit. A traditional plan and a cash balance plan can both be drawn so that the promised benefit presses up against that ceiling. The annual contribution required to fund the promise is whatever the enrolled actuary computes. Any dollar credit you have seen for "a solo owner age 55" or "a consultant age 45" is illustrative. It is not a second IRS cap sitting quietly beside $275,000.

Publication 560 describes both families of plans without picking a winner. Use it as orientation. Use the actuary for the number.

What a traditional formula promises

A traditional defined benefit formula promises a retirement benefit, often a percentage of pay or a flat monthly amount, sometimes averaged over the last few years of compensation. You do not have an account in the way a 401(k) participant does. You have a right to a benefit defined by the formula, subject to the $275,000 ceiling and to the other limits the document and the law impose. Each year the enrolled actuary measures the plan's assets against the value of that promise, using assumptions the law allows, and tells the sponsor what minimum funding requires.

For a solo owner the traditional formula can be powerful, particularly when there is a salary history and the owner is closer to retirement. It can also be awkward. If pay drops, a final-average formula can create a benefit the current year's cash flow did not anticipate, or it can require the formula itself to be amended, which is a formal act rather than a mood. The contribution can move sharply when interest rates, the asset return, or the retirement assumption moves. Owners who want to know, in January, roughly what they will deposit in December often dislike that movement even when the long-run deduction is attractive.

The statement you can show a spouse or a banker is an accrued benefit, not a balance. Some owners read that easily. Many do not. If the only person in the plan is you, the communication problem is smaller than it is in a clinic, and it is not zero. You still have to understand what you promised yourself, because you are also the sponsor who must fund it.

What a cash balance formula promises

A cash balance plan is still a defined benefit plan. The document promises a hypothetical account. Each year the account receives a pay credit, which might be a flat dollar amount or a percentage of pay, and an interest credit at a rate the document defines. The interest credit is not the same thing as the return the trust actually earns. If the investments earn less than the crediting rate, the sponsor generally has to make up the difference over time through funding. If the investments earn more, future required contributions can fall. The investment risk does not move to the participant the way it does in a 401(k), unless the plan is deliberately designed and invested in a way your actuary and fiduciary counsel have accepted. For most small owner plans, the sponsor still stands behind the credit.

The annual benefit limit of $275,000 still applies. The actuary converts the hypothetical account into the benefit the law measures, and will not let the formula promise more than the limit allows. That is why a very large pay credit in a brand-new plan for a younger owner is often not available, and why an older owner's illustrative credit is often larger. Age is doing actuarial work. It is not unlocking a special IRS deposit table. The age discussion, using the later year's published benefit limit once that year is underway, is /insights/age-shape. For 2024, stay with $275,000 as the benefit ceiling and treat every deposit figure as illustrative.

Owners tend to prefer the cash balance statement because it looks like the 401(k) statements they already know. That preference is legitimate. It is not a legal upgrade. Lump-sum distribution, when the plan allows it and the law permits it, is one reason a solo owner chooses cash balance over a traditional annuity formula. The lump sum is not automatic, it is not free of tax, and it is not available on the day you feel like having it. Qualified joint and survivor annuity rules still exist in defined benefit plans. A solo owner without a spouse should not assume those rules are irrelevant; spousal-consent questions have a way of appearing at distribution even in plans that felt informal at adoption.

Which one a solo owner usually lives with

For a true one-person practice, the cash balance plan is the more common choice we are asked to administer, because the owner can see the credit, the CPA can discuss a range, and the formula can often be amended prospectively if the business changes. The traditional plan still belongs in the conversation when the owner is older, wants the funding pattern a classic formula produces, and does not mind an accrued monthly benefit as the measure of progress. Neither choice is a personality type. Both have to be funded. Both can be paired later with a 401(k), which is a different decision described in /insights/combo-plan.

A solo owner should be strict about the word solo. No W-2 employees, no spouse on payroll unless the spouse is intentionally in the design, and no related company with a staff. If any of those are present, you are not in the comparison this note is about. You are in a census problem, and the cash balance plan's friendlier statement does not solve coverage. Start with /insights/census-first and the self-employed overview, and do not let a one-life illustration survive contact with a payroll register.

Funding, deduction, and the dates that are not interchangeable

Whichever formula you choose, two clocks govern the contribution after the year ends. Minimum funding for a calendar-year plan is generally due September 15 of the following year, which is 8.5 months after year-end. Missing it can produce a 10% excise tax on Form 5330. Deductibility often runs, under IRC 404(a)(6), to the due date of the employer's return including extensions. Confirm both with your CPA. Do not let anyone tell you that the traditional plan uses one of those dates and the cash balance plan uses the other. The legal family is the same.

The SECURE Act generally lets a new plan be adopted by the filing deadline, including extensions, and be treated as adopted for the prior taxable year. That rule can apply to either pension. It does not let you make 2024 employee deferrals out of wages that were already paid. If you want deferrals, the 401(k) side has to be alive in this year's payroll. If you want only the pension, you still should not wait until the filing deadline to begin design. An actuary who first hears about the plan in the week the return is due is being asked to certify a wish. The Christmas-week version of that mistake is /insights/do-not-rush-funding.

Interest crediting, in a cash balance plan, and the actuarial assumptions, in a traditional plan, are not decorations. They change the illustrative range of the deposit and they change next year's minimum. An owner who wants the largest possible deduction and the smallest possible volatility is asking for two goods that trade off. Put that tradeoff in front of the enrolled actuary before the document is signed, not after the first asset statement disappoints you.

PBGC, permanence, and the solo owner who will not stay solo

PBGC coverage is plan-specific. A one-person professional practice is often outside coverage because of the professional-service employer rules, and often is not, depending on facts the statute actually uses. Many small professional-service employers are exempt. It is not true that all small plans are exempt, and it is not true that a consultant who might hire a first employee next year can ignore the question. Hiring changes the census and can change coverage. Read the agency's coverage guidance with counsel before you treat exemption as a feature of the cash balance label. The label is irrelevant. The employer and the plan are what matter.

Both plans are real enough to terminate only with care. A solo owner who expects to sell within two years should read /insights/not-a-fit before choosing the friendlier of the two formulas. A friendlier statement does not make a short-lived pension a good idea. Ongoing administration, a trust, a valuation, and a Form 5500 filed on EFAST2 are part of either choice. For a calendar-year plan the Form 5500 is generally due July 31, extendable to October 15 with Form 5558. The IRS overview is the Form 5500 corner. Budget for that work on the fees page rather than discovering it as an annoyance after the deduction has been spent in your head.

Roth catch-up does not choose the pension for you

Notice 2023-62 delayed the SECURE 2.0 Roth catch-up mandate through 2025. It is not in force in 2024. It does not apply differently to a traditional defined benefit plan than to a cash balance plan, because it does not apply to the pension formula at all. It will matter, beginning January 1, 2026, for catch-up deferrals of participants whose prior-year FICA wages exceeded $150,000, inside the 401(k) that may sit beside the pension. If you are choosing between two defined benefit formulas this fall, leave Roth catch-up out of the choice. It is delayed. It is not a design feature of either pension.

How to use an illustration without being used by it

Ask the enrolled actuary for an illustrative range under both formulas, using the same census, the same $345,000 compensation cap if your pay is at or above it, and the same retirement age. Ask what happens to each range if assets earn less than assumed for two years. Ask what happens if you cut your W-2, or your earned income, in 2025. The formula that looks larger in a single good year and brittle in the next year is often the wrong formula, even if the first-year deduction photographs well.

Sterling can coordinate that request. We cannot sign it. The actuary's letter is the document that distinguishes an illustrative teaching number from a figure your CPA might rely on. Until that letter exists, do not move money, and do not tell your bookkeeper to accrue a specific pension expense. The plan lifecycle page describes the work that follows a real signature. Signature comes after the comparison, not instead of it.

What to do in the next two weeks

Make the comparison specific to your practice, not to a generic solo owner.

• Confirm that you are actually solo: no employees, no overlooked spouse on payroll, no related employer. If that confirmation fails, stop this comparison and build the census.
• Ask your CPA for expected 2024 compensation and whether it is W-2 or earned income. Note the $345,000 cap so nobody models pay the plan cannot count.
• Request two illustrative sketches from an enrolled actuary, traditional and cash balance, under the $275,000 benefit limit. Label them as illustrations in your own notes so they do not harden into a target.
• Write down whether you care more about a readable account balance or about a classic accrued benefit. That preference is allowed to decide the tie. It is not allowed to decide the funding obligation.
• If you want 2024 deferrals as well, tell payroll now. The pension choice will not create a retroactive $23,000 deferral.

When the two sketches are in hand, contact Sterling Pension Group if you want the document path and the administration path coordinated with the actuary your CPA is willing to rely on. Choose the promise you can explain on a quiet afternoon. Do not choose the one with the larger unverified number.