Cash Balance Plans for Business Owners in Maryland and Virginia: How Much You Can Really Put Away in 2026
Last reviewed: September 2026 · Educational, not individual tax or investment advice
If you own a business, already max out your 401(k), and still write a large check every April, a cash balance plan can add roughly $100,000 to $350,000 a year of deductible retirement contributions on top of the 401(k), depending on your age and pay. The price is a contribution for your staff of about 5% to 7.5% of their pay, an actuary, and a commitment to keep the plan for several years.
For Maryland business owners there are two extra reasons to look: the state's 2% capital gains surtax starts at $350,000 of federal adjusted gross income, and Maryland's pension exclusion treats a cash balance plan differently from an IRA in retirement. Here is how a cash balance plan works, what it costs, and who it fits.
Most of the business owners I meet in Rockville, Gaithersburg, North Bethesda, and Fairfax, many of them dentists, physicians, and consultants, have the same profile. The business clears more than $500,000 after overhead, both spouses work in it, the CPA files the S corp return on time, and the only retirement plan is a 401(k) with a safe harbor match. They sense they could put away far more. Usually they can. The tool is a cash balance plan.
What is a cash balance plan?
A cash balance plan is a defined benefit pension plan that is written to look like an account. Each year the business credits two things to each participant:
- A pay credit, set in the plan document as a dollar amount or a percentage of pay. For an owner this might be $100,000 or more. For staff it is typically a small percentage.
- An interest credit, either a fixed rate written into the plan (often 4% to 5%) or a rate tied to a market index or the plan's actual return.
The business, not the participant, invests the money and bears the investment risk. If the portfolio earns less than the promised interest credit, the business makes up the difference in future contributions. If it earns more, future required contributions fall. An actuary certifies the required contribution each year.
Because it is a pension, the ceiling is not the $72,000 that caps a 401(k). The IRS limits the benefit the plan can pay, which for 2026 is an annual benefit of $290,000 at retirement (IRS Notice 2025-67). The contribution needed to fund that benefit depends on how many years you have until retirement age. A 60-year-old has few years left, so the allowed contribution is very large. A 40-year-old has many, so it is smaller but still several times a 401(k).
How much can a business owner contribute to a cash balance plan in 2026?
The table below shows first-year contribution estimates from a large plan administrator's 2026 grid for a new plan, at two pay levels: an owner paid at the 2026 IRS compensation limit of $360,000, and an owner paid $200,000. These are estimates, not your number. Your actuary will calculate the exact figure from your census and compensation history.
| Owner's age | Cash balance estimate at $360,000 of pay | Cash balance estimate at $200,000 of pay | 401(k) deferral (with catch-up) | 6% employer 401(k) on $360,000 | Approximate total at $360,000 of pay |
|---|---|---|---|---|---|
| 40 | $124,000 | $124,000 | $24,500 | $21,600 | $170,100 |
| 45 | $159,000 | $159,000 | $24,500 | $21,600 | $205,100 |
| 50 | $204,000 | $204,000 | $32,500 | $21,600 | $258,100 |
| 55 | $262,000 | $240,000 | $32,500 | $21,600 | $316,100 |
| 60 | $336,000 | $240,000 | $35,750 | $21,600 | $393,350 |
| 65 | $349,000 | $235,000 | $32,500 | $21,600 | $403,100 |
Cash balance columns from TRA's 2026 maximum contribution grid, which assumes the pay level has been in place for at least three consecutive years and no prior defined benefit plan. FuturePlan's 2026 table shows similar ranges: $137,000 for ages 40 to 44, $226,000 for 50 to 54, $355,000 for 60 to 65. The 401(k) deferral is $24,500 for 2026, plus an $8,000 catch-up at 50, or $11,250 at ages 60 to 63 (IRS 2026 limits). Catch-up contributions must be Roth if your prior-year Social Security wages from the business were above $150,000 (Notice 2025-67).
Two rules shape those totals.
The 6% cap. When a cash balance plan is paired with a 401(k) and the plan is not covered by PBGC insurance, employer 401(k) contributions are generally limited to 6% of pay under Section 404(a)(7). Professional practices with 25 or fewer participants, such as dental, medical, and law practices, are exempt from PBGC and fall under this cap (PBGC coverage rules). Other businesses are PBGC-covered, pay an annual premium per participant, and are not held to the 6% limit. Either way, employee deferrals do not count toward it. The usual design is a 3% safe harbor plus 3% profit sharing in the 401(k), with everything else in the cash balance plan.
Your salary sets the ceiling. The plan can only fund a benefit your W-2 pay supports. Look at the second column in the table: at $200,000 of pay the TRA grid tops out at $240,000 a year no matter how old you are. At $150,000 of pay it tops out at $180,000, and at $100,000 it tops out at $120,000. The salary you set as an S corp owner also sets your pension room.
Who does a cash balance plan fit best?
Three situations, and only one of them is about the tax rate.
High, steady income with a small staff. The plan works when a few highly paid owners fund most of the contributions and the staff contribution is a modest share of payroll. Dentists, physicians, attorneys, and consultants are the classic cases. A dental practice with two owner-dentists, a hygienist, and four front-desk and assisting staff is the textbook fit. A business with six highly paid managers and a 30-person staff is a different analysis.
The QBI deduction phase-out. Dentists, physicians, attorneys, consultants, and other "specified service" owners lose the Section 199A qualified business income deduction as income rises. For 2026 the deduction starts phasing out at $403,500 of taxable income for joint filers and disappears entirely at $553,500, with the wider phase-in range added by the 2025 tax law (Rev. Proc. 2025-32 analysis). An owner couple with $480,000 of taxable income is losing most of their 20% deduction. A $100,000 cash balance contribution can pull them back under the threshold and restore it. Few other deductions are that large and that legitimate.
Maryland's new taxes start at round numbers. Since tax year 2025, Maryland adds a 2% surtax on net capital gains for anyone with federal adjusted gross income above $350,000, and taxes joint income above $600,000 at 6.25% and above $1.2 million at 6.5% (Maryland Comptroller tax alert, revised December 2025). Employer retirement contributions reduce the S corp income that flows to your K-1, which lowers federal AGI. For an owner sitting just above $350,000, a cash balance plan can change whether the surtax applies to that year's investment sales at all. Montgomery County adds 3.2% on top for 2026, and has approved a 3.3% top bracket on income above $150,000 beginning in 2027.
Who should not open a cash balance plan?
I would rather talk an owner out of this than watch them terminate a plan in year two. The plan is a poor fit when:
- Profit swings widely. The plan has a minimum required contribution each year. If revenue can fall 30% in a bad year, size the pay credit for the bad year, or skip the plan.
- You expect to sell or retire within three to five years. The IRS expects a qualified plan to be a permanent program (Treas. Reg. 1.401-1(b)(2)). Terminating early without a documented business reason can put the deductions at risk.
- Your staff is older and well paid relative to the owners. Nondiscrimination testing then pushes the staff contribution above 7.5% of pay, and the economics deteriorate.
- You want to invest the pension aggressively. The portfolio should aim for the interest crediting rate, not beat the market. Owners who want growth should keep it in the 401(k) and taxable accounts and run the cash balance portfolio conservatively.
- You already have a SEP IRA on the IRS model form. A Form 5305-SEP bars other plans in the same year, a rule we cover in our guide to moving from a SEP IRA to a Solo 401(k). Check before you adopt anything.
Does Maryland tax cash balance plan withdrawals differently from an IRA?
Yes, and this is the part national articles never mention. Maryland's pension exclusion lets a resident who is 65 or older exclude up to $40,600 of retirement income for 2026 from Maryland taxable income, reduced by Social Security received (Maryland Comptroller pension exclusion guidance). It applies to income from an "employee retirement system" qualified under Section 401(a), 403, or 457(b) of the tax code. A cash balance plan is a 401(a) defined benefit plan, so it qualifies. So does your company 401(k). The Comptroller's Technical Bulletin 51 is equally clear about what does not qualify: a traditional IRA, a Roth IRA, a rollover IRA, a SEP, or a Keogh.
That last item is the trap. The default advice when a cash balance plan terminates is "roll it to an IRA." Do that, and the money may lose its Maryland pension exclusion for the rest of your life. Rolling the balance into your company 401(k) instead, or keeping it in a successor plan, can preserve it. This is a decision to make years before termination, not at the paperwork stage. Virginia has no comparable exclusion, so for a Fairfax owner the analysis is mostly federal. The state rules are laid out in our guide to how Maryland taxes retirement income compared with its neighbors.
How to set one up, and when
- Pull a census. Every employee's age, pay, and hire date, plus the owners' W-2 history. This is what the actuary prices.
- Get an illustration from a third-party administrator. It should show owner contributions, the staff cost, the testing margin, and three-year projections. Expect setup fees of roughly $2,000 to $5,000 and annual actuarial and administration fees of roughly $3,000 to $10,000, based on ranges administrators publish. Ask for the fee schedule in writing.
- Decide the interest crediting rate and the investment policy together. A fixed 4% credit paired with a 60/40 portfolio will produce surpluses and shortfalls. A market-based credit tracks the portfolio. Each has consequences for your required contribution.
- Mind the deadlines. Under the SECURE Act a new cash balance plan can be adopted as late as your tax return due date, including extensions, and treated as effective for the prior year. But 401(k) deferrals still have to run through payroll before December 31, and the minimum funding deadline for a calendar-year plan is September 15 of the following year. For a 2026 deduction, start the census this fall.
- Coordinate the salary decision. Your reasonable compensation sets your cash balance ceiling, your 401(k) employer contribution, your payroll tax, and your QBI deduction at the same time. Set it once, with a CPA who plans rather than only files and the actuary in the same conversation.
If you would like the illustration run for your business and the household tax picture modeled alongside it, that is part of our business retirement plan work. You can book a call and bring your most recent census and K-1. More guides for business owners are in our For Business Owners hub.
FAQ: cash balance plans for business owners
How much can a 45-year-old dentist contribute to a cash balance plan in 2026? Plan administrator estimates put the first-year maximum near $159,000 for a 45-year-old owner with at least $200,000 of W-2 compensation, on top of a $24,500 401(k) deferral and a 6% employer contribution. At lower compensation the figure is smaller. An actuary certifies the exact amount from your census and pay history.
Can a business have both a 401(k) and a cash balance plan? Yes, and most do. The 401(k) keeps the employee deferrals and a safe harbor contribution, and the cash balance plan carries the large owner contributions. For professional practices not covered by PBGC insurance, employer 401(k) contributions are generally limited to 6% of pay so the cash balance deduction is not restricted under Section 404(a)(7).
What does a cash balance plan cost for employees? Expect total employer contributions for staff of about 5% to 7.5% of their pay across both plans, with 7.5% the usual gateway when the plan is tested together with a 401(k). A 3% safe harbor contribution you already make counts toward that. Older, higher-paid staff raise the cost, which is why the census comes before the decision.
Does Maryland tax cash balance plan withdrawals? Maryland taxes them as income, but a resident 65 or older can exclude up to $40,600 in 2026 under the pension exclusion because a cash balance plan is a qualified 401(a) employee retirement system. Roll the balance into an IRA and the exclusion is generally lost, per the Comptroller's Technical Bulletin 51. Plan the rollover decision early.
What happens to a cash balance plan when I sell or close the business? The plan is terminated, the actuary settles any funding shortfall, and each participant's balance is paid out or rolled over. For a Maryland owner the destination matters: rolling into the company 401(k) or a successor plan can keep the pension exclusion, while a rollover IRA generally loses it. Decide this with the actuary before the termination paperwork starts.
Sources
- IRS, Notice 2025-67, 2026 cost-of-living adjustments; COLA increases for dollar limitations on benefits and contributions; Defined benefit plan benefit limits
- Internal Revenue Code Section 404(a)(7) (combined plan deduction limit); Treasury Regulation 1.401-1(b)(2) (plan permanency)
- Pension Benefit Guaranty Corporation, Insurance coverage: professional service employer exemption
- Revenue Procedure 2025-32 (2026 Section 199A thresholds), as summarized by Current Federal Tax Developments
- Maryland Comptroller, Tax alert on 2025 legislative changes to income tax rates and the capital gains surtax (revised December 2025); Maryland pension exclusion; Technical Bulletin 51, Senior citizens and Maryland income tax
- TRA, 2026 maximum contributions for cash balance plans; FuturePlan, 2026 maximum contribution limits table (administrator estimates)
Written by Danni Shen, CFA®, Co-Founder & Chief Investment Officer of Allset Wealth. Allset Wealth is a financial planning firm in Hunt Valley and North Bethesda, Maryland, serving business owners, federal employees, and tech employees across Maryland, DC, and Virginia.
Contribution limits are 2026 IRS figures. Cash balance amounts are administrator estimates that an actuary must certify for your plan; the table is illustrative and your numbers will differ. This post is general education, not individual tax, legal, or investment advice. Talk to your CPA, actuary, and advisor before adopting a plan. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and investment advisory services offered through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial. LPLE and LPL Financial are not affiliated with Allset Wealth.
