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The 2025 Advantage: How CPAs Can Leverage Retroactive Cash Balance Plans

Why Retroactive Adoption Matters: Businesses can now establish cash balance plans up to the extended deadline for their tax returns and still treat the plan as adopted as of the last day of the prior taxable year. This allows 2025 contributions to a cash balance plan to be funded well into 2026, providing increased flexibility and a larger window of time for tax planning. Further, compared to defined contribution retirement plans, such as 401(k) plans, cash balance plans typically allow for larger contribution limits that generally increase with age, often allowing business owners to lower their taxable income by significant amounts.

Who Can Benefit: Although any business can establish a cash balance plan, such plans are often especially beneficial for high-earning business owners who want to reduce taxable income, such as professional service employers (e.g., law firms, engineering firms, and medical practices), and closely held corporations. It is important to remember, however, that once established, cash balance plans generally require annual contributions, even in difficult economic times. Accordingly, cash balance plans are best suited to businesses with reliable cash flow.

Key Considerations: To determine whether a retroactive cash balance plan is appropriate, CPAs should explore the following:

1. Income Level and Tax Exposure

• Does your client generally have high taxable income?
• Would a large, deductible contribution meaningfully reduce their tax burden?
• Does your client also qualify for the retirement plan start-up tax credit available under SECURE 2.0? (Be sure to read January’s article for more information on these credits)

• Can the business reliably make required annual contributions over the long term?

• Is the business already maximizing a 401(k) or profit-sharing plan? (This is not required, but it might indicate the business could benefit from additional tax deferral opportunities.)

• Does the client plan to extend their 2025 tax return to maximize time for plan design and funding?
• What deadlines must be met to ensure retroactive adoption is compliant?

• Cash balance plans are required to pay annual premiums to a governmental agency called the PBGC that insures defined-benefit pension benefits, unless an exemption applies.
• Many cash balance plans of smaller employers are exempt from premium payments under exemptions for small professional service employer plans and substantial owner plans.
• Businesses can request a coverage determination from the PBGC to know whether they are required to pay PBGC premiums and comply with other applicable PBGC rules.