Cash Balance Pension Plan Strategies with EP Wealth Advisors

What does a cash balance pension plan cover for an owner close to a sale?

A cash balance pension plan is an IRS-qualified defined benefit plan that presents benefits as a stated account balance, crediting each participant with a set annual pay credit plus a guaranteed interest credit. Ray, 66, walked into this exact crossroad the week his key shop manager offered to buy his 25-year-old machine shop for about $1,500,000 paid out over seven years. Ray wanted to shelter peak operational earnings before the purchase closed, but his personal retirement accounts were capped out.

This arrangement fits an owner past 50 whose profit after owner compensation has stayed dependable for consecutive years, who already defers the 2026 maximum of $24,500 into the 401(k) plus the $8,000 age-50 catch-up ($32,500 total, or $11,250 instead of $8,000 at ages 60-63; employee plus employer additions are capped at $72,000 under Section 415(c)), and who operates within a three to ten year window prior to exit. A simple decision rule applies: request an actuary's census quote if your post-salary profit regularly tops $150,000, your 401(k) deferrals are maxed, and your exit timeline sits between three and ten years.

There is an important calculation rule: the IRS annual benefit limit is reduced by one-tenth for each year of plan participation short of ten. Because a plan established at age 66 runs on a shortened timeline, the ceiling decreases, meaning an enrolled actuary must run precise mathematical testing before any deposit targets are finalized.

Coverage rules also require precision regarding the Pension Benefit Guaranty Corporation. The small-plan PBGC exemption is reserved for professional service firms such as medical or law practices that cover 25 or fewer active participants. A commercial machine shop does not qualify for that carve-out, so Ray's plan pays PBGC premiums every year it is in force.

Deliverables you get from EP Wealth Advisors

At EP Wealth Advisors, family and legacy decide how each pension balance lines up with marital rights and the succession plan. We size contributions so Joan's survivor rights, the children's beneficiary shares and the buyout note all hold up, and so the company never carries an unfunded pension liability into closing.

Below is a breakdown of the specific deliverables produced during the engagement:

• Actuarial feasibility quote: An enrolled actuary runs your full employee census, showing owner credits alongside non-owner staff credits and testing the total against a standalone 401(k).
• Custom funding calendar: A structured timeline mapping mandatory minimums, which come due 8½ months after the plan year concludes, matched against business tax filing deadlines including extensions.
• Asset investment policy statement: An allocation strategy pegged precisely to the plan's stated interest crediting rate without speculative growth targets, avoiding sudden business cash calls. Investing involves risk, including loss of principal.
• Termination and legacy checklist: A phase-out schedule keyed to your target transaction closing, complete with beneficiary documentation and spousal-consent filings covering spouses and adult children.

Which questions should an actuary and an advisor answer before you sign a plan document?

Before adopting a qualified defined benefit plan, business owners should obtain written confirmation of all compliance responsibilities, asset benchmarks, and legal transition rights. Clarifying these terms protects the enterprise from unexpected funding shortfalls while preserving clarity for spouses and heirs.

Make sure your advisory team addresses each of these critical questions in writing:

• Who serves as the enrolled actuary, and who signs the Schedule SB attached to Form 5500 every single filing season?
• What interest crediting rate does the legal document define, how are the assets invested to mirror it, and what is the smallest required contribution if company revenue falls?
• What happens to the plan when I sell: do we terminate it before closing, or could the buyer take it over?
• What are the total yearly carrying costs across all parties, including actuarial fees, third-party administration, Form 5500 filings, and mandatory PBGC premiums?
• How will the plan handle my spouse's consent if I elect a lump-sum rollover, or if I wish to name my adult children as partial death beneficiaries?

Step by step from the actuary's quote to the final rollover

EP Wealth Advisors guides business owners through a structured process that aligns operational retirement funding with future sale agreements.

Step 1 begins with reviewing the prior two years of company tax returns, year-end profit and loss statements, and key employee buyout terms to confirm target closing dates. In Step 2, the actuary evaluates the employee census, tracking birthdates and hire dates. In Step 3, we analyze the net economic impact of non-owner staff allocations against owner allocations. Step 4 covers plan adoption, which the SECURE Act generally allows up to the corporate tax filing deadline including extensions, subject to actuarial confirmation.

During Step 5, the company funds certified contributions annually while keeping underlying investments conservative. Step 6 concludes the process prior to company sale: formal board dissolution resolutions, participant notices, mandatory written spousal consent, lump-sum rollovers into individual IRAs, and updated beneficiary schedules balancing the surviving spouse and children.

Consider this hypothetical example: Ray, 66, anticipates closing the sale of his machine shop to his key manager in three years. The actuary establishes a $200,000 pay credit for Ray each year and $20,000 annually for eligible non-owner staff combined. Over three years, Ray receives $600,000 in credits while non-owner staff receive $60,000. Assuming an illustrative 35% rate for federal and state income tax together, Ray's $600,000 pre-tax deduction defers $210,000 in income tax ($600,000 × 0.35). The staff contributions cost the business about $39,000 after their own corporate deduction ($60,000 × 0.65).

Before closing the business sale, the plan terminates, Ray's spouse Joan signs the spousal consent waiver, and the $600,000 lump sum rolls into Ray's rollover IRA. Taxes are deferred, not eliminated. Ray lets the rollover balance compound while collecting installment payments from the employee's buyout note, with his required minimum distributions beginning at age 75 under current statute.

Notice in the table below how annual owner allocations can dramatically exceed non-owner funding overhead, giving the departing owner significant tax savings during high-income sale preparation years.

Plan sponsors must also respect IRS permanence guidelines. Terminating a qualified plan after only a few cycles requires an acceptable business rationale; an arm's-length corporate divestiture or ownership sale meets this threshold when verified by ERISA counsel.

A common mistake is investing plan reserves aggressively. A 15% market drawdown on a $600,000 account creates a $90,000 cash deficit that the company must make whole prior to termination, hitting the owner's balance sheet right at closing.

How do you get started with EP Wealth Advisors on a cash balance plan?

To start a plan consultation, fill out the request form on the EP Wealth Advisors website. EP Wealth Advisors meets with owners across the United States by video or phone at a scheduled time, and the firmwide relationship minimum is $500K in investable assets.

For the initial strategy discussion, gather your prior two years of corporate tax returns, a current payroll census showing employee ages and service dates, the adoption agreement for the 401(k) you sponsor today, and any active buyout term sheets or letters of intent. Advisory compensation and project fee schedules are delivered in writing before any engagement commences.

Honest boundaries remain central to our legacy philosophy. A cash balance plan defers taxable revenue rather than forgiving it, creating future ordinary taxable distributions upon withdrawal. Furthermore, these plans impose mandatory annual contributions, employee coverage rules, and administrative overhead. If an uneven cash flow year might jeopardize your ability to make the required contribution, EP Wealth Advisors will recommend skipping the pension buildout and sticking with your 401(k) instead.