What are the risks?

Yes. Section 430 of the tax code sets a minimum required contribution each year, and the employer must pay it. The actuary certifies a minimum and a maximum, and the employer may pay any amount between them. An unpaid minimum draws a 10 percent excise tax under section 4971, rising to 100 percent if it stays unpaid.

The actuary is an enrolled actuary, licensed by the federal Joint Board for the Enrollment of Actuaries, who values the plan each year. The minimum is due eight and a half months after the plan year ends. The amount moves each year with the plan’s assets, the benefits it has promised and the pay of the people in it, so the number changes, but the floor is owed every year.

A cash balance plan is a defined benefit plan, and 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.

The IRS page for these plans lists “Most costly type of plan” and “Most administratively complex plan” among the plan’s features. Published fees are on the page about what a plan costs, and the rules for taking money out are on the page about when you can take money out.

The minimum is still due, but the employer has a ladder of steps, from the simplest to the last resort: pay only the minimum, draw on a prefunding balance built in better years, cut future credits after giving notice, or apply to the IRS for a hardship waiver. None of those steps cuts a benefit already earned.

Yes. A freeze is a plan amendment that stops future benefit credits. The plan must give participants written notice at least 45 days before the freeze takes effect, or 15 days for a plan with fewer than 100 participants who have an accrued benefit. A frozen plan still owes the minimum contribution for benefits already earned.

A frozen plan still files its yearly Form 5500 with the actuary’s Schedule SB, still has to meet the participation rule in section 401(a)(26), and may still owe minimum benefits to employees if the plan is top-heavy. Closing the plan for good is a separate step, set out on the page about ending a plan.

An underfunded plan is not a penalty by itself. When the plan’s assets fall short of the benefits it has promised, section 430 spreads the shortfall into the minimum contribution over 15 plan years, in level installments. Quarterly payments are required only in a year after the plan had a shortfall.

If funding falls further, section 436 limits what a single-employer plan may do. Below 80 percent funded, no amendment that raises benefits takes effect. From 60 percent to under 80 percent, lump-sum payouts are limited, and below 60 percent, new benefit credits stop. The actuary certifies the plan’s funding percentage each year. A new plan is shielded from some of these for its first five plan years.

When each payment is due is set out on the page about plan deadlines.

The employer bears the investment risk. Benefits do not depend on the plan’s investment returns, so a loss creates a shortfall, and the shortfall raises the minimum contribution in later years, spread over 15 plan years. A market fall raises what the business pays in the following years, not what the plan has promised.

In a cash balance plan, each account grows by an interest credit the plan document sets. The credit is a promise to participants, not a prediction of what the investments will earn, and the employer funds any gap between the two. How the credit is set is explained on the page about cash balance plans.

A plan fits poorly when profit swings from year to year, when the owner may sell, close or cut pay soon, when staff are older or better paid than the owner, or when the extra deduction is small next to the yearly fees. In those cases a 401(k) profit sharing plan, which has no yearly minimum, may fit better.

A taxable investment account has no yearly minimum, no plan fees and no lock on the money. A plan gives a deduction now, and earnings inside it are not taxed while they stay in the plan, but every dollar paid out later is ordinary income. Which one wins depends on your tax rate now, your rate later and how long you will run the business, and your CPA can weigh those for you.

The cost of covering staff can also outweigh the tax the owner saves. The share of each year’s contribution that must go to employees comes from the actuary’s test on your census, and the rules behind it are on the page about what employees get.