For law firm owners
Cash balance plans for law firms.
Who they fit, what they really cost, and what to answer before you sign anything.
A cash balance plan can let a profitable law firm owner set aside far more each year than a 401(k) allows, with the contribution deductible to the firm. For an owner in their 50s with strong W-2 pay, that can mean six figures a year on top of a 401(k), depending on age, pay, and plan design. It tends to fit owners in their mid-40s or older whose firm produces steady profit, who are already maxing out their 401(k) and profit sharing, and who can commit to funding it for at least several years. It is usually a poor fit if your profit swings widely, your cash is needed to grow the firm, or your staff costs would eat most of the benefit.
The basics
What a cash balance plan actually is
A cash balance plan is a defined benefit pension plan that looks like a 401(k) on your statement. Each participant has a hypothetical account that grows two ways every year:
- A pay credit: a contribution the firm makes, set by the plan's formula (a dollar amount or a percentage of pay).
- An interest credit: a stated rate of growth, either a fixed rate or one tied to an index or the plan's actual returns.
The firm, not the employee, funds the plan, and an actuary certifies each year how much must go in. Because it's a pension, the contribution limit isn't capped at the 401(k) number. It's based on the benefit you could receive at retirement, so older owners can contribute much more each year than younger ones.
For a law firm owner, it's one of the most efficient ways to turn firm profit into personal wealth you control, instead of leaving it in the operating account and paying tax on all of it this year.
How it stacks with your 401(k)
Small firms typically run a cash balance plan alongside a 401(k) with profit sharing, not in place of it. These are the 2026 IRS limits that shape the design:
| 2026 limit | Amount | What it means for you |
|---|---|---|
| 401(k) employee deferral | $24,500 | What you can defer from your own pay. |
| Catch-up, age 50+ | $8,000 | Extra deferral if you're 50 or older ($11,250 if you're 60–63). |
| Total defined contribution (415(c)) | $72,000 | Deferrals plus profit sharing combined, before catch-up. |
| Defined benefit annual benefit (415(b)) | $290,000 | The cap on the retirement benefit a pension can pay. Your yearly cash balance contribution is worked backward from this, by age. |
| Compensation limit (401(a)(17)) | $360,000 | Pay above this is ignored when the plan calculates benefits. |
Source: IRS Notice 2025-67. Limits adjust annually. Starting in 2026, if your prior-year FICA wages were over $150,000, your catch-up contributions must go in as Roth.
The practical result: a 401(k) with profit sharing tops out around $80,000 a year for a 50+ owner. For an older, well-paid owner, adding a cash balance plan can raise that by six figures. Younger owners get less room. Your actuary sets the number.
Is it right for you?
Who it fits, and who it doesn't
Usually a fit
- You're consistently profitable and taking more than you need to live on.
- You already max out your 401(k) and profit sharing.
- You're in your mid-40s or older (more contribution room).
- You want to catch up on retirement savings after years of building the firm.
- Your staff is small, or younger and lower-paid relative to the owners.
- You can commit to funding it for at least three to five years.
Usually not yet
- Your profit swings widely year to year, as it can in contingency practices.
- You need the cash for hiring, marketing, or paying down debt.
- You don't yet have a cash reserve in the firm and at home.
- You haven't maxed out your 401(k) yet. Start there.
- Your staff is large or older, so the required staff cost would swallow the benefit.
- You plan to sell or close the firm in the next year or two.
The real costs
What it really costs
Your staff's contributions
Qualified plans have to pass nondiscrimination testing, so the firm has to contribute for eligible employees too. In many small-firm designs, staff receive roughly 5% to 7.5% of pay through the profit sharing plan, while owners get the large cash balance credits. The exact cost depends on your census: ages, pay, and who's eligible. That's why every design starts with an actuarial study.
Administration
A cash balance plan needs an actuary every year to certify funding and run testing, plus a third-party administrator. For a small firm, those fees commonly run into the thousands of dollars a year, on top of your 401(k) costs. Fees vary widely, so get written quotes from more than one provider.
The commitment
A pension isn't a "contribute if it's a good year" account. The plan requires a minimum contribution each year within a range the actuary sets, and missing a required contribution can trigger IRS excise taxes. You can amend or freeze the plan if your circumstances change, but the IRS expects a qualified plan to be permanent. Plan to fund it for several years.
PBGC
Most defined benefit plans pay premiums to the Pension Benefit Guaranty Corporation. Plans maintained by a professional service employer, which includes a law firm owned by attorneys, are generally exempt if the plan has never covered more than 25 active participants at any time since 1974. Confirm your firm's status with your actuary.
A worked example
One owner, three staff
Hypothetical: the owner is 55 and takes $300,000 in W-2 wages from an S corporation. Three staff earn $180,000 in total. The firm adds a cash balance plan to an existing 401(k) with profit sharing, using a common design where the owner's profit sharing is 6% of pay.
| Owner contribution | 401(k) + profit sharing only | With cash balance plan |
|---|---|---|
| 401(k) deferral | $24,500 | $24,500 |
| Catch-up (age 50+) | $8,000 | $8,000 |
| Profit sharing | $47,500 | $18,000 |
| Cash balance pay credit | — | $175,000 |
| Total for the owner | $80,000 | $225,500 |
At an assumed 40% combined marginal tax rate, the owner's $225,500 defers tax on about $90,200, compared with about $32,000 with the 401(k) and profit sharing alone. Against that, the firm pays a staff contribution of about 7.5% of staff pay, or $13,500 (roughly $8,100 after the firm's own deduction at the same assumed rate), plus annual actuarial and administration fees.
This is a hypothetical illustration, not a projection or a recommendation. The $175,000 pay credit is an assumed design figure. Actual contribution limits are set by an actuary from your age, pay, census, and plan terms. A 401(k) with profit sharing may also require staff contributions, which aren't shown in the first column. Taxes are deferred, not eliminated: distributions in retirement are taxed as ordinary income. Results for your firm will differ.
What drives the result: your W-2 pay
For an S corporation owner, plan contributions are based on wages, not distributions. If your salary is set very low to save on payroll tax, you may also be shrinking what the plan can do for you. Owner's pay has to be reasonable for the work you do, and raising it adds payroll tax, so set it with your CPA. Getting owner's pay right comes first.
Before you sign
Five steps before you sign anything
- 1Pull your census
Gather every employee's date of birth, hire date, hours, and pay. That data drives the whole design.
- 2Get a design study
Have a pension actuary model your contribution range and the exact staff cost, and compare two or three designs.
- 3Stress-test three years of cash flow
Can the firm fund the minimum in a down year? If not, adjust the design or wait.
- 4Coordinate with your CPA
Align owner wages, entity type, and the deduction timing with your tax plan.
- 5Mind the deadline
Under the SECURE Act, a new cash balance plan can generally be adopted as late as your firm's tax return due date, including extensions, and still count for the prior year. Don't wait that long. The design study, documents, and funding all take time.
The Full Docket
A cash balance plan is a team decision.
It touches your cash flow, your owner's pay, your taxes, your retirement, and your exit all at once. That's exactly why we built The Full Docket: one team, one flat fee, one strategy, working from the same file alongside your pension actuary.
Business strategist
Stress-tests whether the firm's profit can carry the commitment in a down year.
CPA
Sets reasonable owner's pay, entity structure, and deduction timing.
CFP®
Fits the plan into your retirement picture and how the assets are invested.
Exit planning advisor
Makes sure the plan works with your timeline to sell, merge, or wind down.
Questions
Frequently asked questions
Is a cash balance plan a defined benefit plan?
Yes. It's a type of defined benefit pension plan. It shows each participant a hypothetical account balance, but the firm promises the pay and interest credits set by the plan's formula and is generally responsible for funding any shortfall.
How much can a law firm owner contribute to a cash balance plan?
It depends mostly on your age and pay. The limit is worked backward from the maximum retirement benefit ($290,000 a year in 2026), so owners in their 50s and 60s with strong W-2 pay may be able to contribute six figures a year on top of a 401(k). Younger owners get less room. An actuary sets your exact range.
Do I have to include my staff?
Eligible employees must be covered and the plan must pass nondiscrimination testing. Many small-firm designs give staff a modest contribution, often around 5% to 7.5% of pay through profit sharing, while owners receive the larger cash balance credits.
What happens if the firm has a bad year?
The plan requires a minimum annual contribution, so a down year doesn't automatically mean you can skip it, and missing a required contribution can trigger IRS excise taxes. Many plans are designed with a contribution range, and a plan can be amended or frozen if your circumstances change. Talk to your actuary before you have to.
Can I set up a cash balance plan for last year?
Generally, yes. The SECURE Act lets an employer adopt a new cash balance plan up to its tax return due date, including extensions, and treat it as effective for the prior year. Your actuary and CPA need to confirm the details for your firm.
Do law firms pay PBGC premiums on a cash balance plan?
Often not. Plans maintained by a professional service employer, such as a law firm owned by attorneys, are generally exempt from PBGC coverage if they have never covered more than 25 active participants at any time since 1974. Confirm with your actuary.
Is a cash balance plan better than a 401(k)?
It's an addition, not a replacement. Firms typically max out a 401(k) with profit sharing first, then add a cash balance plan when the owners want to save more than about $80,000 a year and the firm's profit can support the commitment.
How is the money invested?
The firm invests the plan's assets in a pooled account. Because the firm must fund any shortfall against the promised interest credit, many plans invest more conservatively than a typical 401(k), aiming to match the crediting rate instead of maximizing return.
Find out if it fits your firm.
In a 20-minute Fit Call, we'll look at where your firm and your household are today and tell you plainly whether a cash balance plan belongs in your plan this year or later.
This page is for educational purposes only and isn't tax, legal, or investment advice. Contribution limits and tax rules change, and the right plan depends on your specific facts. Consult your CPA, ERISA attorney, and a pension actuary before adopting any retirement plan. The example above is hypothetical and doesn't represent any actual client.