The final-year cash balance plan: a large deduction before you sell

What is a cash balance plan?

A cash balance plan is a pension plan that behaves like a savings account with a large, age-based contribution limit. Each year the practice credits an amount to each participant's account (a pay credit) and promises a set growth rate on that balance (an interest credit). The practice, not the employee, makes the contribution and takes the deduction. When a participant leaves or the plan ends, the account balance is paid out and can be rolled into an IRA.

The reason it matters to a physician about to sell is the limit. A 401(k) plan caps total contributions for one person at $72,000 in 2026. A cash balance plan is a defined benefit plan, so its limit is written in terms of the yearly pension you are allowed at retirement, which is $290,000 in 2026. An actuary works backward from that pension to figure out how much can be contributed today. The older you are, the less time the money has to grow, so the more you are allowed to put in. For an owner in their late 50s or early 60s, that often means a deductible contribution of several hundred thousand dollars in a single year.

Why is the last year or two of ownership the window?

Because two things line up that never line up again. Your income is at its peak and you still control the plan.

In the year you sell, your ordinary income is unusually high. You collect your final salary and distributions. If the practice is on the cash basis, the accounts receivable are collected or sold and taxed as ordinary income. A payment for your covenant not to compete is ordinary income. Any transition, consulting, or retention pay from the buyer is ordinary income plus payroll tax. All of that is taxed at up to 37 percent federal, plus state tax. The tax pillar page walks through each of these pieces.

A cash balance contribution is a deduction against exactly that kind of income. A dollar contributed saves up to 37 cents of federal tax, and more in a state like California or New York. The same dollar contributed against capital gain would save only 20 cents, and in fact the plan cannot offset the capital gain at all, because the deduction reduces the practice's ordinary business income, not your gain on goodwill.

The second half of the window is control. After closing you are an employee of the management company. Its 401(k) plan governs, and it almost never includes a cash balance plan. Whatever you did not put away as an owner, you cannot put away later at these limits.

What are the 2026 limits?

The IRS published the 2026 retirement plan limits in Notice 2025-67. These are the figures that bound what a plan can do this year.

How much could I actually contribute?

It depends on your age, your pay history, the plan formula, and the actuary. Plan providers publish illustrations, and one provider's 2026 estimates for the cash balance contribution alone are roughly $253,000 at age 55, $325,000 at 60, and $359,000 at 62. Stacking a 401(k) with profit sharing on top of the cash balance plan raises the combined figure, and the same provider shows combined totals of roughly $322,500 at 55, $408,000 at 60, and $442,000 at 62. Other actuaries will produce different numbers for the same physician, sometimes materially different, so use these to decide whether the idea is worth a call, not as a promise.

Two years of contributions at those levels, in the two years before a sale, can shelter a large share of the ordinary income the sale produces. If you are a partner in a group where several owners are in their 50s and 60s, each of them gets their own limit.

Can I still adopt a plan for the year that just ended?

For the employer-funded part, often yes. Under the SECURE Act, an employer can adopt a qualified plan as late as the due date of its tax return for the year, including extensions, and treat the plan as adopted on the last day of that year. A practice that closed a sale in December and has not yet filed its return for that year can, in many cases, still adopt and fund a cash balance or profit sharing plan for that year.

The exception is employee deferrals. The $24,500 you defer from your own paycheck, and the catch-up on top of it, must be elected before the pay is earned. Those cannot be made retroactive. In practice this means the 401(k) piece has to be in place during the year, while the cash balance and profit sharing pieces have more room.

If your sale is still a year or more away, do not wait for the deadline. A plan adopted early gives the actuary time to set a formula that fits your timeline, and gives you two contribution years instead of one.

What happens to the plan when I sell?

In nearly every private equity deal, the practice's plan is terminated rather than assumed by the buyer. That has consequences, and the timing of the sale decides whether they are good or bad.

The plan must be fully funded

At termination, every participant must receive the full account balance the plan promised. If the plan's investments have fallen behind the promised interest credits, the practice must make up the difference before closing. Buyers will look for this in due diligence, and an underfunded plan becomes a closing cost.

Excess assets are a problem, not a bonus

If the plan holds more than it owes, the extra cannot simply be paid to you. Assets that revert to the employer face an excise tax that can run as high as 100 percent, on top of income tax. There are ways to reduce that in some situations, but the safer path is to never get there. If you know a sale is coming, stop overfunding, and consider having the actuary amend the formula 12 to 24 months before the expected closing so the plan lands close to fully funded on the day it terminates.

Your balance rolls to an IRA

Once the plan terminates, you roll your balance to an IRA or into another qualified plan. No tax is due on the rollover. From that point the money grows tax-deferred and comes out as ordinary income in retirement, the same as any other pre-tax account. That rollover IRA also has consequences for backdoor Roth contributions later, which the W-2 planning page covers.

Do I have to cover my staff?

Yes. A cash balance plan is a qualified plan, and qualified plans must pass nondiscrimination tests that compare what owners and highly paid employees receive against what everyone else receives. In practice this means eligible staff get contributions too, usually a percentage of pay rather than the large owner credit, and those contributions are deductible to the practice. In a typical physician practice with a small staff relative to owner pay, the staff cost is a modest share of the total. In a practice with many employees and few owners, the staff cost can eat much of the tax saving. An actuary's illustration shows this split, and you should look at the total cost, not just your own credit.

The PBGC exemption and the combined-plan limit

Most defined benefit plans pay premiums to the Pension Benefit Guaranty Corporation (PBGC), a federal insurer of pensions. A plan sponsored by a professional service employer, and physicians are on that list, is exempt if it has never covered more than 25 active participants. Most physician practice plans qualify, which saves premiums and reporting. The trade-off is that PBGC-exempt plans are subject to a combined-plan deduction limit: when contributions to the defined benefit plan exceed 25 percent of pay, the profit sharing contribution is effectively limited to 6 percent of pay. That is why the illustrations above show the 401(k) and profit sharing add-on as a smaller number than a stand-alone profit sharing plan would allow.

How does this work with a C corporation asset sale?

If your practice is a C corporation and the buyer insists on an asset purchase, the corporation pays 21 percent on the gain and you pay again when the cash comes out, for a combined federal rate that approaches 40 percent before state tax. The two tools that reduce this are selling your personal goodwill directly and taking a large deduction at the corporate level in the year of sale. A cash balance contribution is exactly that kind of deduction. Because the contribution is a corporate expense, it reduces the corporation's taxable income in the sale year, including gain on the assets. This is one of the few situations where the plan deduction reaches gain that would otherwise be taxed at the entity level. The asset sale, stock sale, or F-reorganization page explains why S corporations usually take a different path where this issue does not arise.

What about the buyer's plan after closing?

After closing you become a participant in the management company's 401(k). Two coordination points matter. First, the 415(c) limit of $72,000 applies per person across plans of related employers, and the 402(g) deferral limit of $24,500 applies to you across all employers in the year. If you deferred into your practice's 401(k) before closing, tell the MSO's plan administrator so you do not exceed the deferral limit for the year. Second, your terminated plan's balance can often be rolled into the MSO's 401(k) instead of an IRA. That keeps the pre-tax money inside a plan, which matters if you plan to make backdoor Roth contributions later.

Who should not do this?

A cash balance plan is a commitment, not a one-time deduction, and it is the wrong tool for several kinds of sellers.

• If you are under about 45, the age-based limit is much lower and a 401(k) with profit sharing may capture most of what you can contribute with far less cost and paperwork.
• If the sale is closing within a few months and the plan does not yet exist, the actuarial setup, funding, and termination may not be worth the compressed timeline. The SECURE Act adoption rule helps, but the plan still has to be funded and then wound down.
• If your practice has many employees relative to owners, the required staff contributions can consume the saving. Get the full illustration before you decide.
• If you need every dollar of the final year's income as cash, for example to pay down debt before your pay drops after the sale, locking several hundred thousand dollars into a retirement account may not fit. The money is not available without penalty until retirement age.
• If your deal is almost entirely goodwill with little ordinary income and you are in a no-tax state, the deduction shelters less than you might expect, because it does not touch the 20 percent capital gain.

An advisor who recommends the plan without first asking your age, your staff count, and how much of your deal is ordinary income has not done the work.

What to do next

1. Estimate your ordinary income in the sale year

   Add up your expected final-year compensation, accounts receivable collections, any non-compete allocation, and any transition or consulting pay. That total is the most the deduction can reasonably offset.

2. Get an actuarial illustration

   Ask a third-party administrator or actuary for a cash balance illustration for every owner, showing the owner credits, the staff cost, and the combined total with a 401(k) and profit sharing plan. Ask them to model a plan that terminates on your expected closing date.

3. Set the funding target to the closing date

   If the sale is 12 to 24 months out, have the actuary design or amend the formula so the plan is fully funded, and no more, when it terminates. Overfunding is the expensive mistake here.

4. Coordinate with the deal

   Tell your deal counsel the plan exists so its termination is handled in the purchase agreement, and tell your CPA so the deduction, the rollover, and any 401(k) deferrals at the MSO are reported correctly in the sale year.