Cash Balance Plans: The Retirement Lever Most Medical Practices Skip

A cash balance plan is a type of defined benefit plan that, unlike a traditional pension, expresses each participant's benefit as an account balance that grows through an annual employer contribution plus a guaranteed interest credit — closer in feel to a 401(k) statement, even though it's legally structured as a defined benefit plan. That structure is exactly what makes it useful for a medical practice: it allows contribution levels far beyond what a 401(k) or SEP alone can reach, especially for older, higher-earning partners.

This matters specifically for physicians because, as covered elsewhere on this site, the 20% qualified business income deduction phases out completely for most practicing physicians due to the specified-service classification. With that lever unavailable, a cash balance plan becomes one of the few remaining tools that meaningfully reduces taxable income directly, by moving real dollars into a qualified retirement account rather than relying on a deduction that doesn't apply.

The contribution amounts scale with age and compensation, which means an older partner nearing retirement can often shelter a substantially larger amount than a younger associate, sometimes well into six figures annually when combined with a 401(k) profit-sharing contribution layered underneath it. That age-based scaling is also why a cash balance plan tends to make the most sense for a practice with partners spread across a range of ages and income levels, rather than a single young associate on their own.

The tradeoff that gets underestimated is the funding commitment. Unlike a 401(k), where contributions can flex year to year, a cash balance plan generally requires a more consistent, actuarially-determined contribution to stay properly funded — it isn't a plan you fund generously in a good year and skip in a lean one without consequence. There's also real administrative cost: actuarial valuations, annual filings, and plan document maintenance that a straightforward 401(k) or SEP doesn't require.

None of this makes a cash balance plan the right answer automatically — it makes it worth modeling seriously for a practice where the partners' ages, income levels, and the QBI phase-out combine to make it genuinely valuable. That modeling, run against a specific practice's actual partner composition and income, is the analysis we do before recommending a cash balance plan rather than treating it as a default add-on.