How much tax will I save?
In the case of a defined benefit plan to which subsection (a)(1)(A) applies (other than a multiemployer plan), the amount determined under this subsection for any taxable year shall be equal to the greater of: (A) the sum of the amounts determined under paragraph (2) with respect to each plan year ending with or within the taxable year, or (B) the sum of the minimum required contributions under section 430 for such plan years.
Single-employer plans. An enrolled actuary figures the ceiling each year. Read 26 U.S.C. 404(o)(1) in full (opens in a new tab)
The short answer
An employer's contribution to a defined benefit plan is deductible up to a ceiling an enrolled actuary figures each year, and a deduction lowers taxable income rather than the tax itself. The tax saved is about the deduction multiplied by your marginal federal and state rate, and the staff share and the yearly fees are separate costs that are generally deductible too, so each costs you its amount less the tax it saves. The tax is deferred, not avoided, because every dollar the plan pays out later is ordinary income.
Are cash balance plan contributions tax deductible?
Yes, up to a ceiling. An employer’s contribution to a defined benefit plan is a tax deduction, up to a ceiling the plan’s enrolled actuary calculates each year under section 404 of the tax code. A deduction lowers taxable income, not the tax bill itself, and a contribution above the ceiling draws a 10 percent excise tax.
A cash balance plan is a kind of defined benefit plan, so the rules in this answer apply to it.
The ceiling is the greater of what the plan needs to fund its promised benefits with a cushion, less its assets, or the year’s minimum required contribution. A contribution counts for the tax year if the business pays it by the return’s due date, including extensions. The deduction date and the due date for the minimum contribution are two different rules.
26 U.S.C. 404(o)(1) (opens in a new tab)Internal Revenue Service, Publication 560 (opens in a new tab)26 U.S.C. 4972(a) (opens in a new tab)26 U.S.C. 404(a)(6) (opens in a new tab)Both due dates for a 2026 plan year: When is the deadline to start?
How much will I actually save in taxes?
The tax saved this year is about the deduction multiplied by your marginal federal and state rate, and your entity type decides where the deduction lands. If the deduction carries part of your income down into a lower bracket, that part saves tax at the lower rate.
What the plan costs you is a separate figure. The contribution for your staff and the plan’s yearly fees are generally deductible too, so each one costs you its amount less the tax it saves. The tax is deferred, not avoided. Your CPA confirms the figures for your own return.
The 2026 federal rates are 10, 12, 22, 24, 32, 35 and 37 percent. For 2026 the top rate of 37 percent applies only above $640,600 of taxable income for a single filer and $768,700 for a married couple filing jointly. Money in the plan is taxed as ordinary income when it is paid out.
Internal Revenue Service, 2026 inflation adjustments release (opens in a new tab)Internal Revenue Service, Rev. Proc. 2025-32 (opens in a new tab)Is a cash balance plan tax deferred?
Yes. The contribution is deducted now, and earnings inside the plan are not taxed while they stay in the plan. Every dollar paid out is ordinary income to the person who receives it, and a distribution before age 59½ carries a 10 percent additional tax unless an exception applies.
Whether deferring the tax pays off depends on your tax rate now against your rate when the money comes out. Your CPA can compare the two for you.
Internal Revenue Service, Publication 560 (opens in a new tab)26 U.S.C. 402(a) (opens in a new tab)26 U.S.C. 72(t)(1) (opens in a new tab)When and how the money comes out: When can I take money out?
How do state taxes change it?
Your state’s income tax rate adds to the federal rate when you work out the saving. Michigan taxes individual income at a flat 4.25 percent for 2026. California adds a 1 percent surtax on taxable income above $1,000,000 on top of its bracket rates. For any other state, and for your combined rate, ask your CPA.
Michigan Department of Treasury, April 15, 2026 (opens in a new tab)Cal. Rev. & Tax. Code 17043(a) (opens in a new tab)Does a cash balance plan reduce taxes more than a 401(k)?
A cash balance plan can, because the two plans are capped differently. For 2026 a 401(k) with profit sharing is capped at $72,000 of total additions for each person, with the $24,500 deferral counted inside that cap and a catch-up on top. A defined benefit plan has no dollar cap on the contribution, only on the benefit.
For an older owner with high, steady pay, the contribution an actuary figures can run well past the 401(k) figure, and the larger deduction comes with mandatory yearly funding and a higher yearly cost. An owner can keep the 401(k) and add the pension plan beside it.
IRS Notice 2025-67, 415(c)(1)(A) and 402(g)(1) (opens in a new tab)Where does the deduction go on my return?
A C corporation deducts the contribution on its corporate return, Form 1120. An S corporation deducts it on Form 1120-S. A partnership reports it on Form 1065 and passes each partner’s own contribution through on Schedule K-1, so each partner deducts it on a personal return.
A sole proprietor deducts the owner’s own contribution as an adjustment to income under section 62(a)(6), and deducts the contribution for employees as a business expense. For a sole proprietor or a partner, the pay the plan counts is earned income figured after the plan deduction itself. Your CPA checks the lines against the current year’s Publication 560.
Internal Revenue Service, Publication 560 (opens in a new tab)26 U.S.C. 62(a)(6) (opens in a new tab)26 U.S.C. 401(c)(2) (opens in a new tab)What are the risks?
The IRS lists the defined benefit plan as the most costly and the most administratively complex type of plan. The contribution is mandatory each year within the actuary’s range, and an unpaid minimum is taxed at 10 percent, then 100 percent. The employer bears the investment risk: benefits do not depend on asset returns, so a shortfall raises future contributions.
The money is locked until age 59½, separation or plan termination, with a 10 percent additional tax on early distributions. Staff must be covered and credited under federal tests. Fees for the actuary, the administrator and the filings are paid every year.
Internal Revenue Service, Defined benefit plan page (opens in a new tab)26 U.S.C. 4971(a)(1) and (b) (opens in a new tab)26 U.S.C. 401(a)(36) (opens in a new tab)Checked on October 15, 2026.