Cash Balance Plans: What Happens If Your Income Drops?

You had a strong year. The numbers were up, cash flow looked solid, and your CPA said it was the perfect time to set up a Cash Balance Plan (CB plan). So you did. But now, 12 to 24 months later, things aren’t quite as predictable. A couple of clients pushed back projects, and your quarterly revenue dipped; suddenly, that contribution target feels a little tight.

This is the moment that hinders partners from moving forward in the first place. Not because they doubt the tax savings. Not because they don’t want to save more for retirement, but because they’re asking the right question:

What happens if my income drops after starting a CB plan and I can’t fund it at the original level?

It’s a fair concern and one worth addressing before you make a commitment.

Fortunately, CB plans are designed to allow annual adjustments. While they are governed by IRS rules and require formal administration, contribution amounts can vary year to year within defined ranges. Future benefit accruals can be paused through a formal plan amendment and notifying participants, if needed. And if your plan is built correctly, it won’t become a burden when business slows down.

This article walks through what happens when your income dips after starting a CB plan and how the structure protects your tax strategy and plan integrity.

What a Slower Year Might Look Like

Let’s say you’re a partner in a firm. In your peak year, you earn $ 900,000. Your CPA and plan administrator run the numbers, and you decide to contribute $200K into a new CB plan. Everything lines up: strong income, strong tax deduction, and a retirement boost.

Fast forward two years. Business is still healthy, but not exceptional. You’re tracking closer to $450,000 this year. Suddenly, that original contribution number starts to feel out of step with what’s available in your budget.

This is precisely the situation most partners worry about upfront: What happens if I can’t or don’t want to contribute that much anymore?

Many partners are surprised to learn they’re not boxed in.

Your contribution amount isn’t fixed for life. In fact, most well-managed plans are reviewed annually and include a range of allowable funding levels under IRS guidelines.

That means if income drops or priorities shift, you have room to adjust. And depending on how your plan was set up from the start, you may already have a wide contribution range in place.

What are Your Options When Income Drops

A CB plan isn’t an all-or-nothing commitment. If income slows down, you don’t have to keep funding the plan at peak levels. IRS rules allow a contribution range that adjusts annually based on factors like compensation, age, actuarial assumptions, and plan funding status.. Here’s how you can adjust without undoing everything you’ve built:

• Adjust Contributions (Annually Within IRS Guidelines)

Contribution amounts aren’t fixed year over year. The IRS allows your plan actuary to set a range of contributions, typically with a floor and a ceiling, based on factors such as age, compensation, actuarial assumptions, and plan funding status.

If your income is down, the plan actuary can recalculate a lower contribution amount that still keeps the plan compliant and on track. You may even be able to drop the contribution to zero, if the plan is overfunded.

This isn’t a loophole; it’s a core feature of how these plans work. As long as you’re operating within the allowable range and managing the plan annually, you can adjust without triggering penalties or risking qualification.

• Use Prior-Year Carryforwards

Let’s say you contributed well above the minimum requirement during a high-income year. That excess funding doesn’t disappear; it’s recorded as a credit on your funding schedule and can be applied toward future obligations.

In a slower year, your plan administrator can apply that credit to meet funding targets in lower-income years, sometimes eliminating the need for a new contribution altogether. That means you maintain plan integrity and compliance while preserving cash in the short term.

This strategy is beneficial for partners with uneven income, strong in one year, slower in the next. It creates breathing room and prevents short-term slowdowns from disrupting long-term retirement or tax strategies.

• Pause Future Accruals

If needed, you can freeze the plan, meaning new benefits stop accruing temporarily. Freezing stops new benefit accruals but does not terminate the plan, provided proper IRS/ERISA procedures and participant notices are followed.

Freezing is a permitted IRS mechanism often used during periods of reinvestment or reduced cash flow. Your existing benefits are preserved, and the plan remains in good standing.

When business rebounds, you can unfreeze the plan, update contribution projections, and resume accruals based on updated income and goals. It’s a clean, IRS-compliant way to step back without stepping out.

• Supplement with Business Reserves or Bonuses

Suppose you still want to maximize contributions in a slower year, for tax or retirement reasons. In that case, you can fund the plan using retained earnings, accumulated reserves, or discretionary year-end bonuses.

This option gives you control over how you meet your funding target, without pulling from your monthly cash flow or operating income. It’s not a requirement, but it can be a helpful tactic if you’re looking to stay consistent with your deductions or build momentum for long-term savings goals.

Some partners even time their contributions to coincide with quarterly distributions or performance-based bonuses to mitigate the impact.

How a Well-Structured Cash Balance Plan Protects You

The risk isn’t starting a CB plan. The risk is starting one without enough flexibility built in.

When a plan is designed correctly, it doesn’t just optimize for Year 1; it accounts for what might happen in Year 3, Year 5, or during an unexpected downturn. That means your contribution range is wide enough to adjust, your funding assumptions are realistic, and your exit options are clear if you ever need them.

At Cash Balance Plan Partners, we don’t just calculate your max deduction and call it a day. We plan for fluctuation. Each plan is:

• Reviewed annually and recalibrated
• Modeled with income swings in mind
• Built with realistic funding assumptions and flexibility features

Here’s what that means for you:

• You don’t overcommit. We show you your full range, not just the top end, so you know what’s possible in a strong year and what’s sustainable in a lean one.
  
  
• You’re not surprised. Your plan is reviewed and recalibrated annually, so contribution targets reflect your current income and goals, not outdated projections.
  
  
• You’re not exposed. Built-in tools, such as accrual freezes, carryforwards, and minimum funding options, protect your cash flow when priorities shift. These credits, called funding surpluses, are tracked by your actuary and reduce future minimum required contributions.

The goal is to give you a high-deduction plan that flexes with your business, without losing the compliance, tax, or retirement advantages.

If you’re working with an administrator who only shows you the maximum contribution number, you’re not getting the whole picture. A successful plan comes with margins. That way, when your income shifts, your retirement strategy doesn’t become a liability.

What a Flexible Cash Balance Plan Looks Like in a Slower Year

¹ Approximate pre-tax income after CB plan funding.

Questions to Ask Your Admin Before You Commit to a CB Plan

Before you start a CB plan, make sure you’re asking the right questions—not just about the tax deduction today, but about how the plan holds up when things shift tomorrow.

Here’s what you should be asking your plan administrator upfront:

• What happens if my income drops in future years?

You need to know whether your plan allows for reduced contributions if your revenue takes a hit, so you’re not locked into funding levels you can’t meet.

• Can my contribution range be adjusted annually?

This indicates whether your plan provides you with flexibility each year, or if you’ll be locked into a static number regardless of your business's performance.

• Do you build carryforwards or contribution buffers into the plan?

Strong years should help cover slower ones. If your plan isn’t designed to carry that cushion forward, you could end up overpaying when income dips.

• Can I pause future accruals if needed?

Freezing the plan can help you protect cash flow without shutting it down. Ensure that the option is clearly outlined and easy to activate.

• How often is my plan reviewed and recalibrated?

A once-and-done setup doesn’t cut it. Your plan should be revisited annually to ensure it aligns with your actual income, rather than outdated projections.

• What assumptions do you use when setting funding targets?

Aggressive assumptions might maximize deductions, but they also limit flexibility. Conservative planning gives you room to breathe.

• What’s my real range, not just the max contribution?

Knowing the top-end number is helpful, but knowing the low end is what keeps your plan sustainable in off years.

The right questions now can save you from big surprises later. Make sure your admin is planning for the whole picture, not just a strong first year.

The Smartest Time to Plan Is Before Things Slow Down

A CB plan isn’t just a tax strategy for high-income years; it’s a way to create structure, options, and predictability across all kinds of years. When your plan is built to flex, a dip in income doesn’t mean a funding crisis. It means you already have a strategy in place.

The partners who benefit most aren’t waiting for the perfect moment. They’re planning for variability from the start, locking in tax savings when possible, protecting cash when needed, and keeping their long-term goals intact no matter what the year throws at them.

If you want to control your tax outcomes and build consistent wealth, the best time to start isn’t when things are perfect; it’s when you’re ready to plan around change.

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. CB 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.