Cash Balance Plans for Small Firms: Big Tax Savings, Minimal Staff Costs

You’ve heard about the tax benefits of a Cash Balance Plan (CB plan). Maybe your CPA has even run the numbers and shown you what you could deduct each year. But there’s still one thing holding you back: the cost of covering employees.

It’s a valid concern. No partner wants to set up a plan that benefits staff more than it benefits the person funding it.

In lean professional firms, employee contributions often amount to a small percentage of the total plan cost. With intentional plan design, staff costs can be a fraction of what you contribute for yourself.

This article explains typical employee funding levels, how they compare to partner contributions, and how to design a compliant plan that prioritizes partner benefits.

Why Employee Cost Worries Stop So Many Partners

One of the biggest concerns partners raise about CB plans is the cost of staff.

Specifically: If I contribute $200,000 to my CB plan, how much do I have to give to my employees?

That’s reasonable—but often based on outdated assumptions. The IRS requires a meaningful contribution for eligible employees, but not a large one, especially in small headcount settings.

For small firms with just two or three staff, employee contributions are typically modest, around 6% to 7.5% of salary.

For example, an employee earning $60,000 may receive contributions of $3,600–$4,800 (6%–7.5%) per year—fully deductible and minimal compared to the $150,000–$250,000 in partner contributions.

Still, this concern holds many partners back. They envision a plan where staff contributions account for a significant portion of the budget. In reality, the numbers are often smaller and much more manageable than expected.

When plans are structured intentionally, they focus on your benefits without overspending on employee accounts.

What the Numbers Look Like (2–3 Employee Scenario)

Let’s say you’re a partner earning $500,000 and exploring a CB plan. You have two full-time employees: one earning $55,000 and another earning $70,000.

Here’s what a typical setup might look like:

Note: These percentages reflect typical contribution levels needed to meet IRS nondiscrimination rules in a combo plan structure. Exact splits depend on your team’s age, income, and plan design.

At a 35% marginal tax rate, the $180,000 partner contribution could generate approximately $63,000 in tax savings. And if your taxable income is near the $394,600 mark, contributing to a CB plan may help you stay below the threshold where the 32% bracket begins, keeping more of your income in a lower tax tier.

Here’s what that means in practice: you might contribute more than 20 times as much for yourself as for your employees. While staff contributions are required, they’re reasonable, fully deductible, and typically represent a small portion of the total funding—while remaining compliant.

How a Cash Balance Plan Keeps Employee Costs in Check

A CB plan comes with rules, but it also comes with tools. The IRS requires that eligible employees receive a meaningful contribution, but what qualifies as “meaningful” is surprisingly manageable for firms with smaller teams. Here’s how we help partners keep employee costs low while staying fully compliant:

Minimum Gateway Contributions

Most firms pair their CB plan with a Profit Sharing Plan. Together, these plans allow you to satisfy IRS nondiscrimination testing without inflating employee benefits.

The “gateway” rule typically requires that staff receive a minimum of 7.5% to 8% of their salary across all plans (CB plan, 401(k), and profit sharing). That’s not an extra 8% from the CB plan alone—it’s the total. So, if employees are already receiving 3% in Safe Harbor 401(k) contributions, you only need to make up the rest.

This setup gives you a clear cap on employee funding, while leaving plenty of room for a much larger contribution to your account.

Integrated Plan Design

When we coordinate your 401(k) Profit Sharing Plan and CB plan, we’re not just layering benefits; we’re optimizing how they interact.

By allocating smaller percentages to employees through the 401(k) Profit Sharing Plan, and reserving the Cash Balance contribution primarily for the partner, we’re able to pass compliance testing without distributing considerable benefits across the board.

In practice, this allows you to fund $150,000 to $250,000 pre-tax for yourself while keeping total employee contributions within the $5,000 to $15,000 range, depending on your salary and team size.

Age and Tenure Considerations

Plans don’t need to include every employee from day one. We can delay eligibility for new hires using age and service requirements allowed under IRS rules, such as a one-year waiting period or minimum age of 21.  Plans are not required to include contract employees or W2 employees who work less than 1,000 per year.

If your team includes younger or newer staff, this gives you more control over who’s covered and when. And if the team is support-level, primarily employees in their 20s or early 30s, their benefit accruals under a Cash Balance formula will naturally be lower due to how pension calculations work.

This isn’t about excluding people, it’s about ensuring your plan reflects how your firm is structured today.

Annual Recalibration

Every plan is reviewed annually, not just for compliance, but for strategy. If your revenue changes, staffing shifts, or you want to reduce outlays in one year, we can adjust contributions within the allowable IRS range.

That means you’re never stuck with a fixed number. We fine-tune contributions each year to reflect what your firm can support, keeping employee funding efficient while protecting your long-term goals.

The goal isn’t to minimize what your employees receive just to check a box. It’s to meet IRS requirements in the most efficient way possible, so your firm gets the full benefit of a partner-focused retirement strategy without unnecessary overhead.

Small Firm? You May Be Better Positioned Than You Think

If your firm has just a few employees, you’re in a strong position to set up a CB plan. The smaller the team, the easier it is to control costs, model contributions, and stay compliant, without the administrative weight or funding pressure that larger teams can bring.

Here’s why lean firms are often better suited than they realize:

Lower Overall Funding Requirements

With only two or three staff members, your total employee contribution remains low, even when you meet all IRS requirements. You’re not trying to fund retirement accounts across multiple departments. You’re contributing a few thousand dollars per person, fully deductible, while directing $150,000 to $250,000 (or more) toward your retirement. The smaller the headcount, the more efficient the math becomes.

Simplified Testing and Administration

Nondiscrimination testing and compliance checks are significantly easier when your team structure is straightforward. Fewer job classifications, simpler salary bands, and consistent hours make the annual plan review process faster and more predictable. You’re not chasing paperwork, you’re focusing on strategy.

Tighter Compensation Bands

In smaller firms, the gap between partner compensation and employee wages tends to be wider, and that works in your favor. Why? CB plan contributions are based on salary and age. If your employees earn $50,000 to $70,000 and you earn $400,000 to $500,000, the required staff contributions remain modest, while your funding capacity stays high. This ratio is what makes the plan work.

Built-In Flexibility

With fewer people to account for, you can make decisions faster and adjust your plan annually based on your firm’s performance. Want to contribute less this year? Freeze accruals. Want to increase contributions in a high-income year? Scale up to the top of your range. Lean firms have the advantage of agility, without sacrificing structure or compliance.

This level of control is one of the reasons CB plans are especially popular among small law firms, solo practices with support staff, and consulting firms with lean internal teams.

In short, fewer employees don’t mean fewer options. It means more control and more focus on the partner’s benefit.

The Real Question: What Are You Giving Up by Not Doing It?

Most of the partners we speak to overestimate what they’ll have to contribute to staff and underestimate what they could be putting away for themselves.

Yes, you’ll have to contribute something to the employees. However, in a lean firm, that cost is often $ 5,000 to $15,000 total. And in exchange, you could be deferring $150,000, $200,000, or even $300,000 of your income, shielding it from 32% to 37% tax rates and keeping more of it working for your future.

Here’s what that looks like in real terms:

• A $200,000 contribution at a 35% marginal rate could reduce your tax bill by around $70,000
  
  
• A $250,000 contribution at a 37% rate? That’s nearly $92,500 in annual tax savings.
  
  

Even after you factor in staff contributions, you’re likely ahead by tens of thousands of dollars every year, and that’s before any investment growth on the funds you’ve set aside.

The question isn’t whether employee contributions cost something; it’s whether they are worth it. They do. The real question is: how much are you losing each year by not putting this in place?

Sample Contribution Tiers by Headcount

Let’s break down three simple scenarios that show how CB plans work in real firms with lean teams.

Each example assumes:

• The partner wants to defer between $150,000 to $250,000 of their income
  
  
• The plan passes IRS nondiscrimination testing.
  
  
• Staff are W-2 employees with salaries between $55,000 and $80,000
  
  

Scenario A: One-Partner Firm with Two Employees

Partner’s Tax Savings Estimate: ~$66,600 (at 37% marginal rate)
Net advantage: Even while contributing $8,750 toward employee benefits, the partner defers $180,000 in income and saves roughly $66,600 in federal taxes, keeping the majority of the benefit while staying fully compliant.

Scenario B: Two Partners, One Employee

Total Partner Contributions: $300,000
Total Staff Contributions: $5,600
Combined Tax Savings Estimate: ~$105,000 (at 35% bracket)

Even with a single employee, the firm defers $300,000 in partner income while contributing just $5,600 for staff, an efficient, partner-first structure that stays well within IRS rules.

Scenario C: One Partner, One Admin

Partner Tax Savings Estimate: ~$92,500
Admin contribution cost: $4,200

Even at the highest partner contribution levels, staff costs remain minimal and deductible.

Each of these setups demonstrates how a CB plan can be a partner-first, compliant, and cost-efficient solution, even if you’re not running a large team. You don’t need scale, you need alignment.

Employee Costs Don’t Have to Be a Dealbreaker

For many firm owners, the assumption is simple: “If I want the tax savings of a CB plan, I’ll have to spend a fortune on my team.” But when you look closer, the math tells a different story.

With the proper structure, small firms can keep staff contributions modest and fully deductible, while directing the majority of retirement dollars toward the partners. Add in simplified testing and tighter compensation bands, and the outcome is clear: lean teams aren’t a limitation—they’re a strategic advantage.

CB plans were built for profitable years and smart tax timing. And when done right, they allow firm owners to invest in themselves first, without tipping the scale on overhead.

Still unsure whether it pencils out? It’s worth finding out.

Disclosure: The information provided on this website is for general informational and educational purposes only and is not intended as legal, tax, or investment advice. Actual tax savings will vary based on your individual circumstances, including filing status, income level, existing retirement plans, and other deductions. Cash Balance Plans and other retirement strategies must be carefully structured and administered to comply with IRS regulations. You should consult with a qualified tax advisor, financial planner, and/or pension specialist before implementing any strategy discussed here.