Cash Balance Plans: A Retirement Strategy for Medical Practices

For a medical practice with strong, predictable earnings, a cash balance plan can create more room to fund retirement. The opportunity is not just a larger deduction: the practice also needs an investment strategy that supports the benefits it promises.

The following hypothetical example is not an actual IFP client outcome. It uses a four-partner anesthesiology practice and 2024 contribution assumptions to show how the numbers fit together.

When might a cash balance plan fit a medical practice?

Consider four partners, each earning more than $600,000 annually and contributing $60,000 a year under an existing retirement arrangement. They want to accelerate retirement funding without treating the practice's continuing cash needs as an afterthought.

A cash balance plan may be worth evaluating when the practice can support recurring contributions and the owners' retirement goals fit the employee population. Staff coverage, contribution requirements and plan costs matter alongside the partners' potential deductions.

How does a cash balance plan work?

A cash balance plan is a defined-benefit pension plan. Participants receive pay credits and interest credits under the plan's benefit formula, but those bookkeeping balances are not individually directed investment accounts.

The plan's actual investments support its promised benefits. Investment results do not directly determine the typical participant's credited balance; the employer bears the investment risk. That makes the plan's benefit formula, funding needs and investment policy closely connected.

An actuary determines the required funding and deductible contribution limits. A $150,000 pay credit is not automatically a $150,000 deductible contribution: actual funding depends on the plan's assets, liabilities and actuarial calculations. These distinctions are explained in the Department of Labor's cash balance overview and IRS Publication 560.

What do the example's numbers show?

Assume the plan's actuary has confirmed the illustrated contributions for the partners' ages and compensation, and that the combined arrangement satisfies the applicable coverage, nondiscrimination and deduction requirements. The example uses these annual amounts per partner:

• 401(k) elective deferral: $23,000.
• Employer profit-sharing contribution: $30,000.
• Employer contribution to the cash balance plan: $150,000.

Total: $203,000 per partner, or $812,000 for four partners. The $23,000 elective-deferral assumption corresponds to 2024; it is not the current annual limit. The IRS publishes the limits by tax year.

The assumed existing contributions total $240,000 annually: four partners contributing $60,000 each. The new arrangement therefore adds $572,000 in annual partner contributions.

If every additional deductible dollar would otherwise be taxed at 37%, the additional current-income-tax reduction is:

• $572,000 × 37% = $211,640 per year.
• Over four identical years: $846,560, or approximately $847,000.

For comparison, applying the same rate to all $812,000 of annual contributions produces $300,440 of current-tax reduction a year, or about $1.2 million over four years. That larger figure includes the deductions already assumed under the existing arrangement; it is not the improvement over that arrangement.

The illustration isolates the partners' assumed contributions. It does not include required staff funding, administration and actuarial costs, investment costs, changes in tax brackets or later distribution taxes. Actual participant ages and employee data are needed for an actionable plan design.

These are current-income-tax reductions, not permanent tax-free proceeds. Traditional qualified-plan distributions are generally taxable when received, as described in IRS Publication 560.

Why does the investment pool need its own strategy?

The investment portfolio should support the plan's benefit promises, expected payments and funding needs. The employer, actuary and investment manager need a shared understanding of the interest-crediting formula, liquidity requirements and the effect of investment shortfalls on future contributions.

IFP brings disciplined asset allocation, attention to portfolio costs and ongoing coordination with the plan's specialists to the investment pool. The objective is to support the plan, rather than simply pursue the highest possible return.

A retirement plan also needs an investment strategy

Integrity Financial Planning can manage a cash balance plan's investment pool, coordinating the portfolio with the plan's objectives and the work of its actuary and administrator. Plan design and tax advice remain with the appropriate specialists.

Talk with Todd about investment management for your plan.