Higher Contributions
Combining a Cash Balance or DB plan with a 401(k) Profit Sharing plan allows contributions far beyond traditional limits. For high earners, this can mean hundreds of thousands of additional pre-tax dollars each year.
Combination Plans: The Power of Pairing Defined Benefit and Defined Contribution Strategies
The right combination of plan types can unlock significant tax savings, maximize retirement contributions, and meet Department of Labor and IRS compliance requirements, all while helping business owners attract and retain top talent.
A Combination Plan, or DB/DC combo, integrates a Defined Benefit (DB) plan, such as a Cash Balance Plan, with a Defined Contribution (DC) plan, typically a 401(k) Profit Sharing Plan. Together, these plans create one of the most powerful retirement strategies available to closely held and professional service businesses.
The terms DB/DC Combination Plan and Cash Balance/401(k) Combination Plan are often used interchangeably, but there’s a small distinction worth understanding.
- A Defined Benefit (DB) plan promises a fixed benefit at retirement. Traditional DB plans use a formula based on salary, age, and years of service.
- A Cash Balance plan is a modern form of a Defined Benefit plan that expresses benefits as a “hypothetical account balance.” It’s easier for participants to understand but is still governed by DB rules.
- A Defined Contribution (DC) plan, such as a 401(k) with Profit Sharing, lets participants and employers make contributions that grow over time but doesn’t promise a specific retirement payout.
When a business sponsors both plan types, they are tested together for compliance (nondiscrimination testing) under IRS rules. This allows owners to make larger, tax-deductible contributions while ensuring the plan remains fair and compliant for employees.
What Types of Businesses Benefit Most from a Combination Plan?
Combination plans are designed for profitable, stable companies that want to accelerate owner savings while offering valuable benefits to employees. These plans can be structured to balance owner goals with employee fairness, often allowing owners and key executives to contribute well into six figures annually while keeping employee costs manageable.
They’re especially effective for:
Professional Services
Professional service firms such as medical practices, law firms, and accounting firms often have the right balance of high earning owners and important support staff that is ideal for combo plans.
Small-Mid sized Companies
Small to mid-sized businesses with fewer than 50 employees can benefit from the balance of tax savings and recruiting incentives a great DB/DC combo plan can bring to the table.
Stable, Tenured Businesses
Companies with consistent annual revenue and predictable cash flow are best when considering DB/DC plans because of the contribution commitments Defined Benefit/ Cash Balance plans have built into their structure.
Owners Planning For Exit
Business owners nearing retirement who want to maximize tax-deferred contributions are a great match for combo plans. DB/DC plans help owners save for retirement tax-deferred and not take any equity off the company’s balance sheet.
Case Study: Arizona Plastic Surgery Practice
Practice Profile:
- 3 partners, 17 employees
- Located in Scottsdale, Arizona
- Stable, high annual revenue and steady growth
Challenge:
The partners wanted to build substantial retirement savings while reducing their taxable income. Their existing 401(k) plan provided solid employee benefits, but it capped their personal contribution limits. They also wanted to ensure the plan met all IRS nondiscrimination testing requirements and could serve as a competitive tool for recruiting surgical and administrative staff.
Solution:
Nydia Retirement Solutions designed a Cash Balance Plan layered with a 401(k) Profit Sharing Plan. The combined structure allowed each partner to contribute more than $250,000 annually, while staff received proportional contributions that satisfied nondiscrimination testing. The 401(k) remained a valuable benefit for all employees, supporting retention and improving participation.
Results:
- Each partner reduced taxable income by six figures annually.
- The practice accumulated over $3 million in projected retirement assets within ten years.
- The plan structure met all DOL and IRS compliance requirements.
- Employee satisfaction and retention improved due to the enhanced 401(k) offering.
This design not only delivered significant tax advantages and long-term savings for ownership, it also reinforced the practice’s position as an employer of choice in a competitive industry.