# Pairing a Cash Balance plan with a 401(k)

> Why the combination is the standard design, and how the pieces stack up for an owner.

Source: https://askactuary.com/cash-balance-and-401k  
Author: Mike Rutkowski, FSA, EA, MSPA

Most Cash Balance plans for businesses with employees sit alongside a 401(k) profit sharing plan. Together they give owners the largest deduction for the least staff cost.

## The short version

- The owner keeps full 401(k) deferrals, including catch-up contributions.
- Profit sharing delivers most of the staff contribution needed for testing.
- Employer 401(k) contributions are generally deductible up to 6% of eligible pay when there is also a Cash Balance plan.
- The Cash Balance plan carries most of the owner's tax-deferred savings.

## How the pieces stack up for an owner

**Illustrative · owner age 55, pay $360,000, 2026 limits**

- **401(k) salary deferral:** $24,500
- **Catch-up deferral, age 50+:** $8,000
- **Profit sharing contribution, 6% of pay:** $21,600
- **Cash Balance pay credit:** $275,000
- **Total for the owner:** $329,100

The Cash Balance amount depends on age, pay, plan history, and staff. Owners age 60 to 63 can defer up to $11,250 in catch-up instead of $8,000.

## What each plan does

|  | 401(k) profit sharing | Cash Balance |
| --- | --- | --- |
| Owner's role | Deferrals, catch-up, a profit sharing share | Most of the owner's savings |
| Staff's role | Profit sharing contribution, typically most of the 5% to 7.5% gateway | A small credit to satisfy 401(a)(26) |
| Investment risk | Each participant | The employer |
| Flexibility | Profit sharing is discretionary each year, with employee minimums needed to pass testing | A required minimum every year |

## EXTREMELY IMPORTANT: The 6% deduction rule

When an employer sponsors both a defined benefit plan and a defined contribution plan, total deductions are subject to a combined limit. In practice, employer contributions to the 401(k) side are deductible up to 6% of eligible participants' pay without reducing the Cash Balance deduction. Salary deferrals don't count toward the 6%. Plans covered by the PBGC are exempt from the combined limit.

## Safe harbor 401(k) plans

A safe harbor 401(k) avoids annual deferral testing and can satisfy the top-heavy minimum. Its contribution also counts toward the staff gateway, which often makes it a natural partner for a Cash Balance plan. Typically we recommend a 3% safe harbor to NHCEs only. This helps to satisfy testing while offering the most flexibility possible.

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Educational information only. Not tax, legal, or investment advice, and not an actuarial valuation.
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