What physicians should know about potential tax savings through cash balance pension plans

Many business owners and entrepreneurs are seeking ways to maximize their retirement plan savings. Cash balance pension plans soared in popularity in response to those needs — and thanks to clearer guidance issued by the IRS in 2010.

Often overlooked or underappreciated in the medical profession is that independent medical practices and physicians providing services as independent contractors can enjoy many of the retirement savings benefits that business owners and entrepreneurs can enjoy, such as taking advantage of a cash balance pension plan.

What exactly is a cash balance pension plan?

First introduced in the mid-1980s, these plans were used sparingly and didn’t catch on until certain legal issues were clarified in the 2006 Pension Protection Act, 2010 IRS Cash Balance regulations and 2014 Final IRS Cash Balance regulations.

Cash balance pension plans are employer-sponsored retirement plans that incorporate elements from traditional defined benefit plans along with the flexible characteristics of defined contribution plans (401(k)). These hybrid plans provide the ability for high-income business owners and partners in professional service firms to save upward of $266,000 annually based on demographics and plan design (see note below).

Why should physicians consider cash balance pension plans?

There are three particularly compelling reasons why independent physicians may wish to consider adopting a cash balance pension plan:

Supercharged tax deferral

Standard stand-alone defined contribution retirement plans, such as a 401(k) plan, cap out around $70,000/year between employee and employer contributions. However, a cash balance pension plan, stacked on top of a 401(k), can push total contributions for the benefit of an employee to $200,000 to $300,000 or more per year, depending on age. Because pretax contributions are used, income is sheltered at the physician’s highest marginal tax rates (often over 37% when federal and state taxes are combined). For a high-earning physician in their late 40s or 50s, the tax savings alone can be significant and transformative.

Catching up on lost time

Physicians face a uniquely compressed savings window. Because of years of medical school, residency and fellowship requirements, coupled with $200,000 to $400,000 in student loan debt, in addition to other financial commitments, such as partnership buy-ins, overhead costs and loan repayment, most physicians don’t begin to save meaningfully until their mid- to late 30s. And because of these financial headwinds, serious wealth accumulation often doesn’t begin for physicians until well into their 40s — a decade or more behind peers in other professions. A cash balance plan directly addresses this savings inequity: Because contribution limits increase significantly with age, the physicians who most need to catch up are permitted to contribute the most, especially in their mid- to later years.

Federal creditor and malpractice protection

As a qualified plan governed by the Employee Retirement Income Security Act (ERISA), a cash balance plan enjoys federal creditor protection — not merely state-level protections that vary in strength and scope. ERISA’s anti-alienation provisions generally shield plan assets from creditors, judgments and malpractice claims. For physicians systematically building wealth over a career, directing a substantial portion of those assets into an ERISA-protected vehicle is as much a risk management strategy as it is a supercharged retirement savings strategy.

How significant is the growth and retirement savings impact of a cash balance pension plan?

Over the past two decades, cash balance pension plans have increased by more than 1,025% or 11 times the number of plans when originally created, according to the 2025 National Cash Balance Research Report, presented by FuturePlan Cash Balance Center of Excellence. In addition, the 2025 Future Plan Report indicated that over $1 trillion in assets (the most current analysis available) of the 2023 Form 5500 for plans with more than 25 participants, there were 10,620 cash balance pension plans covering more than 9.5 million participants, with assets of $1.06 trillion. While the number of participants decreased slightly from 10.5 million, the assets held still exceeded $1 trillion.

Here’s more context for their growth in popularity, also from the report’s findings:

• From 2003 to 2022, cash balance pension plans grew nearly eight times faster than 401(k) plans; with increasing rates of 17%, they are the fastest-growing part of the pension universe.

Cash balance pension plans represented more than 37% of all defined benefit plans in 2018 versus only 3% in 2001.

So, who’s using cash balance pension plans?

While some Fortune 500 companies have converted their traditional pension plans to a cash balance format, small and medium-sized businesses have contributed most to the recent popularity of these plans. These plans are ideally suited for businesses that have consistent cash flow and are highly profitable.

Companies with 100 employees or fewer now represent 94% of all cash balance pension plans, and more than 60% of all cash balance pension plans are sponsored by employers with fewer than 10 employees.

58.9% of all plans are sponsored by medical/dental groups and law firms.

How are cash benefit plans similar to traditional defined benefit plans? And how are they different?

Similar to traditional defined benefit plans, employers make contributions for the benefit of each employee. However, instead of using an actuarial rate of return, the employer makes two contributions for each employee. The first is a pay credit, which is either a fixed amount or a percentage of annual compensation. The second contribution is an interest credit rate (ICR), which is typically set to equal the actual rate of return of the portfolio, thereby reducing the investment risk of market volatility and the possibility of having an underfunded plan.

Another defining difference is that a hypothetical account is maintained for each employee. Contributions are recorded into these accounts, providing the employee with the ability to understand their benefit as a hypothetical account balance, similar to a 401(k) account, instead of a specific monthly benefit upon retirement.

To maximize their effectiveness, 96% of cash balance pension plans are combined with 401(k), profit sharing and other defined contribution plans. This allows for plans that are maximized for the benefit of the business owner while also helping recruit and retain employees.

What are the benefits of cash balance pension plans?

• Not all participants are equal — Plans can be designed to maximize benefits to owners while minimizing contributions to other employees. Since contributions are age-based, older business owners may be able to contribute as much as $350,000 annually in 2025 and reap upward of 90% of the benefits of the plan (see note below).
• Income tax reduction strategies — Contributions to retirement plans reduce your taxable income dollar for dollar. With a 37% current maximum federal tax rate, along with additional taxes on earned income over $200,000 ($250,000 married, filing jointly) for Medicare and Affordable Care Act surcharges, the income tax savings for high-income earners could be significant for participants in a cash balance pension plan.
• Asset protection — All qualified pension plans are protected under ERISA. The ability to accumulate large sums makes these plans particularly attractive to doctors, lawyers and entrepreneurs.
• Eliminate the potential of an underfunded pension liability — Regulatory revisions allow the plan’s ICR to equal the plan’s actual rate of return, thereby eliminating a plan’s ability to be underfunded due to market declines. The plan’s assets must be adequately diversified.
• Federal guarantee — As with all pension plans, cash balance pension plans can be guaranteed by the Pension Benefit Guaranty Corporation for a nominal fee.
• Portability and value — IRS regulation allows for a maximum accumulation of $3.5 million. After a three-year vesting period, account values can be rolled over to an Individual Retirement Account (IRA), or a lifetime annuity can be purchased. Knowing the market value of your retirement benefit makes planning more meaningful and easier to understand.

What are the risks of cash balance pension plans?

Risks associated with cash balance pension plans include the following:

Funding inflexibility and a long-term commitment as contributions are mandatory and not optional.

Unlike a 401(k) plan, a cash balance pension plan requires a set contribution every year as a nondiscretionary contribution on behalf of an employee. If practice revenue drops unexpectedly, the funding obligation must still be satisfied — creating real cash flow pressure. Consistently missing required contributions can trigger IRS penalties or even plan disqualification. To mitigate this risk, up-front planning with subject matter experts is essential to determine, actuarially and financially, the optimum sustainable funding commitment that a practice should undertake.

Also, it should be noted that terminating a cash balance pension plan early is complex and costly, and can attract IRS scrutiny. Physicians who anticipate an early retirement, a practice sale or a merger should think carefully about the timing of such events before establishing a cash balance pension plan and exploring other options.

Because all employees must be covered, in addition to physicians, financial and cash-flow considerations may be unappealing to the owner(s) of the medical practice.

ERISA requires that nonowner employees receive meaningful plan benefits as well. In practices with significant staff, the added cost of covering employees can meaningfully reduce — or in some cases eliminate — the net tax benefit to the physician-owner. However, an advanced plan feasibility study and benefits analysis can assist the physician(s) in assessing and ascertaining the potential tax and financial benefit to a physician if all eligible nonphysician staff members are covered, which may still be of significant benefit to a physician(s).

What do these plans tend to invest in? And historically, have those investments yielded good results?

In terms of what a cash balance pension plan tends to invest in, it should be noted that individual participants don’t have their own segregated investment accounts. Instead, all contributions to the plan are pooled into a single plan trust, and the trust — managed by the plan trustee, typically the physician-owner — invests the assets collectively. Because the trust is managed at the plan level, it can invest in a broad range of assets, including the following:

• Mutual funds
• Exchange-traded funds (ETFs)
• Individual stocks and bonds
• Fixed income and money market instruments (particularly popular given the plan’s need to reliably meet the plan’s guaranteed interest crediting rate); and
• Fixed annuity contracts (sometimes used to match the plan’s guaranteed crediting obligation)

Also, it should be noted that in a cash balance pension plan, the practice — not the employee — bears the investment risk. If plan assets underperform the guaranteed interest crediting rate, the physician-owner must make up the difference through additional out-of-pocket contributions, creating unbudgeted funding obligations. To mitigate this concern and potential undesirable outcome, in-depth plan analysis and plan design by a team of subject-matter experts are essential before implementing a cash balance pension plan.

If physicians need to borrow against money in a cash balance pension plan, can they do so?

As a qualified plan under ERISA, a cash balance pension plan can permit loans if the plan document is specifically drafted to allow them. However, most cash balance pension plans are specifically drafted to exclude loan provisions to prohibit borrowing from the plan. There are practical reasons for not permitting plan loans, such as the following:

• Cash balance pension plans are primarily designed for maximum tax-deferred accumulation — borrowing runs counter to that purpose.
• The plan’s pooled trust structure makes loan administration more complex than in a typical 401(k), thereby driving up administrative costs in the plan.

IRS rules require that funds borrowed from a qualified plan be repaid in full within five years. Defaulted loans are treated as taxable distributions to the borrower, subject to income tax and potential penalties, such as a premature distribution penalty if the borrower is younger than age 59 1/2.

Loans can disrupt the plan’s investment strategy and its ability to reliably meet the guaranteed interest crediting rate.

Are there minimum withdrawals starting at a certain age?

Since a cash balance pension plan is a qualified retirement plan with a long-term savings horizon in focus, distributions from a cash balance pension plan are generally permitted under the following circumstances:

• Retirement — typically at the plan’s defined retirement age, commonly 59 1/2 or older
• Separation from service — leaving or dissolving the practice triggers a distributable event
• Plan termination — if the plan is formally terminated, balances must be distributed
• Death or disability — qualifying events that trigger early distribution rights

And like all qualified retirement plans, cash balance pension plans are subject to IRS Required Minimum Distribution rules: Distributions must begin by April 1 of the year following the year the participant turns 73 (under current SECURE 2.0 Act rules).

If I’m an employer, should I consider using a cash balance pension plan in my package of benefits for my employees?

As a physician-owner of your practice, you will want to determine whether the net derived benefit to yourself (and family members in your practice) justifies implementing a cash balance pension plan and associated costs to cover all nonphysician staff. Before proceeding, you will first want to conduct a plan feasibility study and benefits analysis to assist you in your decision-making. The feasibility study can help assess certain employees who may be legitimately excluded from the plan, and the benefits analysis can help quantify potential tax and financial benefit to yourself as a physician, as well as potential benefits to nonphysician staff but who are also family members, as is often the case with many medical practices, to arrive at an aggregate potential tax and financial benefit in implementing a cash balance pension plan.

Is a cash balance pension plan right for you?

Cash balance pension plans represent an opportunity for business owners to take advantage of enhanced tax savings, maximizing their retirement savings and protecting their assets. They have changed the landscape of retirement planning, especially as their popularity has soared.

Because all qualified retirement plans are subject to a myriad of regulatory issues, we recommend engaging a qualified third-party actuary to design a plan to meet your needs.

John Campbell, J.D., CLU, is chief wealth strategist and head of wealth planning and trust services at Calamos Wealth Management. He is responsible for overseeing client relationships and providing expertise on sophisticated wealth strategies such as estate planning, retirement planning and tax mitigation.
_{Note: 2025 age-based contribution limits. Maximum contributions vary by age, with potential contributions up to $336,000-$350,000 annually for older participants (typically age 55+). Actual contribution amounts are determined by an actuary based on age, compensation, interest rates, and mortality tables. Actual contribution amounts are determined by an actuary.}

_{Calamos Wealth Management and its representatives do not provide accounting, tax, or legal advice. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Each individual’s tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized advice from Calamos Wealth Management LLC. A copy of Calamos Wealth Management LLC’s current written disclosure statement discussing our advisory services and fees is available upon request.}