Many small business Cash Balance (CB) plans are exempt from PBGC coverage. That means a simpler plan termination process: no PBGC standard termination filing, no 60-day PBGC review period, and no PBGC premiums to worry about at the end. However, there’s still a specific sequence of steps that needs to happen in the right order to close down a plan. This is the roadmap I walk clients through.

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1. Review Funded Status

Before we initiate a plan termination, our office reviews the plan’s funded status to determine if the plan is overfunded or underfunded. If the imbalance is severe in either direction, the plan may not be able to terminate right now. In that case, the first job is building a strategy to bring the funded status into a range that allows for a clean termination.

2. Review Minimum Funding

Next, we determine whether the plan has a minimum required contribution (MRC) due for the intended final plan year. If it does, we calculate the final MRC and communicate that number to the plan sponsor. The MRC must be contributed before the benefits are paid out to the terminated plan participants. We prefer that plan sponsors contribute the MRC prior to the termination date.

3. The 204(h) Employee Notice

Participants must be notified that the plan is terminating at least 15 days before the termination date. Our office will work with the plan sponsor to determine a plan termination date and draft the notice. The plan sponsor will distribute the notice to plan participants.

4. Plan Termination Amendment

The plan sponsor signs an amendment formally terminating the plan. The termination amendment also includes any plan changes necessary to facilitate a smooth termination.

5. Participant Distribution Forms

Around the termination date, our office prepares distribution forms for each participant. The plan sponsor provides these to the terminate participant. Each form shows the participant’s estimated final benefit and gives them the opportunity to elect a form of payment and tax treatment.

6. Reasonable Search for Missing Participants

If a participant does not return their distribution forms, the plan sponsor must perform a reasonable search to locate the participant. The DOL expects a documented, sequenced search:

1. Certified mail: The plan sponsor sends distribution forms and notices to the participant’s last known address. Undeliverable mail will trigger an escalation of the search.

2. Check related records: The plan sponsor reviews records under any other plan the employer maintains, along with HR and payroll files that may have a more current address.

3. Contact designated beneficiaries: The plan sponsor must attempt to identify and contact anyone the missing participant has designated as a beneficiary (spouse, children, etc.) to obtain updated contact information.

4. Use free electronic search tools: FAB 2014-01 requires the use of free electronic search tools, including internet searches, Social Security Administration letter forwarding, and the IRS letter-forwarding program.

5. Document everything: Under the DOL’s 2021 Best Practices guidance, documenting the search itself is a fiduciary obligation. If it isn’t written down, it didn’t happen.

Once the search is complete and documented and the participant is confirmed missing, the plan can distribute the benefit in one of two ways:

a. Roll the lump sum into an IRA at PenChecks, who will keep searching and connect the participant with their money.

b. Send the lump sum to the PBGC’s Missing Participants Program.

7. Initiate Distributions

Once all distribution election have been returned and any missing participant searches are completed, our office calculates the final distribution amounts and sends the plan sponsor instructions on how much to distribute and where to send it.

8. File the Final Form 5500

A Form 5500 is required for every plan year the plan holds assets, including the final one. The final 5500 is due seven months after all plan assets have been distributed, or nine and a half months with an extension.

9. Send Form 1099-Rs

Form 1099-Rs go out to participants in January of the year following distribution.

The Takeaway

None of these nine steps is difficult on its own. What’s important is that they happen in the correct sequence, especially the 204(h) notice timeline and the missing participant search. Plan sponsors should build their termination timeline backward from their target completion date. Plan sponsors shouldn’t set a termination date until they know whether the plan can fund its final MRC. If you’re working through a plan termination and want a second set of eyes on the timeline, our office would be happy to review it.

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Over the last year, I’ve seen a growing number of insurance salespeople and financial advisors post on LinkedIn about 412(e)(3) plans like they’re some kind of best-kept secret. “Massive deductions.” “Guaranteed contributions.” “Built-in death benefit.” The pitches are slick, the case studies are tidy, and the comments are full of CPAs and advisors asking how to get their clients into one.

I think it’s worth a reminder of where these plans came from, what happened the last time they got popular, and where the IRS still stands.

I’ll say up front: a properly designed, properly funded 412(e)(3) plan is not illegal. Section 412(e)(3) of the Internal Revenue Code allows these plans. However, the structure has a long, documented history of being abused, and the IRS has not changed their opinion of these plans. Anyone marketing these plans today is marketing into a regulatory environment that’s been actively hostile to 412(e)(3) plans for over twenty years.

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What a 412(e)(3) Plan Is

A 412(e)(3) plan is a defined benefit plan that’s funded exclusively through fixed annuity contracts, life insurance contracts, or a combination of the two. Before the Pension Protection Act of 2006, these were known as 412(i) plans. The PPA renumbered the section, effective for plan years beginning after December 31, 2007. The substantive rules did not change. The regulations are still at Treas. Reg. § 1.412(i)-1.

The pitch has always been the same. Because the plan is fully insured, it’s exempt from the minimum funding standards under IRC § 412(e)(2)(B). No enrolled actuary is required. The insurance company’s contractual guarantees are what determine the contribution. Sell that to a small business owner and it sounds great: large deductible contributions, predictable funding, a guaranteed retirement benefit, and a death benefit on top.

The problem is what advisors and insurance agents did with that structure once they figured out how to push it.

The Aggressive Marketing Era

In the late 1990s and early 2000s, 412(i) plans became a popular vehicle for what were essentially tax shelters built on top of qualified retirement plans. The play worked like this.

Insurance carriers and promoters designed life insurance policies specifically for the 412(i) market. These policies had unusually high premiums in the early years, artificially suppressed cash values, and large surrender charges that kept the policy’s reported value low for as long as the participant held it inside the plan. The plan would deduct the full premium as a contribution. Then, before the surrender charges burned off, the participant would purchase the policy from the plan at the depressed cash surrender value. Once the policy was out of the plan and in the participant’s hands, the surrender charges would expire, the cash value would “spring” to its true level, and the participant would have a substantial asset purchased for pennies on the dollar.

The promoters called this springing cash value. The IRS eventually called it something else.

Two things were happening at once. First, plan sponsors were getting outsized deductions for premium contributions that bore no realistic relationship to the actual retirement benefit being funded. Second, participants were extracting cash-rich insurance policies from qualified plans at artificially low values, dodging income tax on the embedded value of the policy. Both ends of the transaction were aggressive. Stacked together, they were abusive.

The IRS Crackdown

In February 2004, Treasury and the IRS issued a coordinated package of guidance specifically targeting these plans. The package included Rev. Rul. 2004-20, Rev. Rul. 2004-21, Rev. Proc. 2005-25, and a Treasury press release that named 412(i) plans directly. The guidance designated certain 412(i) arrangements as “listed transactions” for tax shelter reporting purposes. That’s the most serious classification the IRS uses for transactions it considers abusive.

The guidance hit three issues:

1. Plans that funded deductions with life insurance contracts where the death benefit exceeded what was needed to provide the participant’s actual plan death benefit, with the excess reverting to the plan as a return on investment.

2. Springing cash value policies designed to suppress reported value inside the plan and “spring” higher after distribution.

3. Discriminatory plan designs that funneled disproportionate insurance coverage to owners and highly compensated employees.

Once a transaction was on the listed transaction list, the consequences scaled fast. Plan sponsors had to disclose participation on Form 8886. Failure to disclose triggered penalties under IRC § 6707A that, before later reform, could exceed $100,000 per year for individual taxpayers and $200,000 for corporations. Promoters faced separate penalties. Audits followed. Many of the plans that had been sold in the early 2000s ended up being unwound, with deductions disallowed and participants facing tax on the full fair market value of distributed contracts.

The Pension Protection Act renumbering in 2006 did not undo any of this. The IRS guidance under 412(i) applies just as much to 412(e)(3) today.

How TPAs Reacted

I came into this industry after the crackdown was already in full effect, but the response in the TPA and actuarial community was clear and durable. Most reputable TPA firms stopped administering 412(e)(3) plans in the late 2000s and have not picked them back up. The conversation in our world shifted to Cash Balance plans almost completely.

There were good reasons for that shift, and they go beyond the 2004 guidance. CB plans can produce contribution levels that rival what a 412(e)(3) can generate, with significantly more flexibility, no insurance entanglement, no listed transaction exposure, and a benefit structure that participants can understand. The 2010 Cash Balance regulations made the design even more workable. Between 2010 and today, CB plans have grown into the standard tool for large-deduction retirement planning at small businesses. 412(e)(3) plans have not.

When a TPA firm sees a 412(e)(3) plan come in the door today, the response is almost universally the same. The TPA declines to take on the plan as a client. The TPA community is small. We talk to each other. We know what these plans have historically looked like, and we know what happens when the IRS audits one.

The IRS Position Has Not Changed

This is the part that matters for anyone currently watching the LinkedIn pitches.

The IRS guidance from 2004 is still active. Rev. Rul. 2004-20 has not been revoked or softened. The listed transaction designation is still on the books. The IRS still maintains a page on Employee Plans Abusive Tax Transactions that calls out 412(i) and 412(e)(3) plans specifically, and the guidance language on that page has not meaningfully changed in twenty years. The substantive concerns the IRS raised in 2004 (overstated deductions, springing cash value, discriminatory designs, inflated death benefits) all still apply to plans being sold today.

A 412(e)(3) plan isn’t automatically abusive. A plan that funds a reasonable benefit with reasonably priced insurance contracts, with no springing cash value gimmicks, no discriminatory benefit structure, and no scheme to distribute the policy at a suppressed value, can be a legitimate qualified plan. The problem is that the plans being marketed on LinkedIn are rarely those plans.

The pitches I’m seeing right now follow the same playbook from twenty years ago. Maximum contributions. Insurance product as the centerpiece. A “tax-free” or “low-cost” exit strategy involving policy distribution. Talking points designed for advisors and small business owners who do not know the history. In some cases, the language has been updated to sound more compliance-conscious, but the underlying economics are recognizable.

What I Tell People Who Ask

When a CPA or advisor asks me whether a 412(e)(3) is a good fit for their client, my answer is consistent. Our office does not administer 412(e)(3) plans, and I would encourage you to be skeptical of anyone who is currently marketing them aggressively.

If a client wants a defined benefit plan with high contribution levels and a guaranteed retirement benefit, we can build a cash balance plan that delivers a comparable result without the regulatory exposure. The numbers usually work out at least as well, and often better, once you account for the actual cost of the insurance-based design and the audit risk that comes with it.

If you have seen one of these pitches in your feed and want to know whether the math holds up against a cash balance plan alternative, send it over. I’ll run the numbers and tell you what I see.

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The SECURE 2.0 Act created a new plan feature called a Pension-Linked Emergency Savings Account, or PLESA. It’s been available since the 2024 plan year. Adoption has been close to nonexistent. I want to walk through what a PLESA actually is, the rules that govern it, why almost no plan sponsor has added one, and then make the case for why emergency savings belongs in the retirement planning conversation regardless of which vehicle a business chooses.

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How SECURE 2.0 Created the PLESA

The SECURE 2.0 Act of 2022 was enacted December 29, 2022, as Division T of the Consolidated Appropriations Act, 2023. Section 127 of that law created the PLESA. The governing rules sit in new sections 801 through 804 of ERISA, with parallel provisions in section 402A(e) of the Internal Revenue Code. The feature became effective for plan years beginning after December 31, 2023.1

In January 2024, the DOL issued a set of 20 FAQs covering administration of PLESAs, and the IRS issued Notice 2024-22 addressing the anti-abuse rules tied to the employer match.2 Both sets of guidance can be relied on now. More guidance was promised. As of this writing, the substantive picture hasn’t changed much.

This was an optional provision. SECURE 2.0 made it available to sponsors of 401(k), 403(b), and governmental 457(b) plans. No sponsor is required to add it, and a sponsor that adds it can terminate it at any time without violating the anti-cutback rules under IRC § 411(d)(6).3

What a PLESA Actually Is

A PLESA is a short-term Roth savings account that lives inside a defined contribution plan and is designed to be tapped for emergencies without the usual penalties or friction that come with raiding a retirement account.

The mechanics:

1. Who can participate. Only non-highly compensated employees. An eligible participant must meet the plan’s age and service requirements and must not be an HCE. A participant who later becomes an HCE keeps the account and can keep withdrawing from it, but can no longer contribute.

2. Contributions. Roth (after-tax) only. The account balance is capped at $2,500, indexed, or a lower amount the sponsor selects. Employer contributions are not permitted into the PLESA itself. PLESA contributions count toward the IRC § 402(g) elective deferral limit, which is $24,500 for 2026.

3. The match. Here is the part sponsors should read twice. If the plan provides a match on regular elective deferrals, the sponsor must also match PLESA contributions at the same rate. That match does not go into the PLESA. It goes into the regular plan account and follows normal distribution and tax rules. SECURE 2.0 required the IRS to write anti-abuse rules because, without them, a participant could contribute to the PLESA, collect the match, withdraw the contribution, and repeat. Notice 2024-22 addresses this. Matching contributions are treated as first attributable to elective deferrals outside the PLESA, and the total match attributable to PLESA contributions is capped at the account balance limit.

4. Withdrawals. The participant can withdraw all or part of the account at their own discretion, at least monthly, with no requirement to prove a hardship and no 10% early distribution penalty. Because it is a Roth account, withdrawals of contributions and earnings come out tax-free. The first four withdrawals in a plan year cannot be subject to fees. Reasonable fees are permitted after that.

5. No minimums. A plan cannot require a minimum amount to open a PLESA, cannot impose a minimum balance, and cannot close or liquidate the account for dropping below a threshold. The DOL was explicit on this point.

6. Auto-enrollment. A sponsor can automatically enroll eligible employees at up to 3% of compensation. Employees must receive a notice 30 to 90 days before the first contribution, and annually after that. They can opt out and withdraw at no charge.

7. Investments. Contributions must be held in cash, an interest-bearing account, or a capital-preservation product that provides a reasonable rate of return consistent with liquidity. Products with surrender charges or liquidity constraints are generally incompatible with the statute’s purpose.

8. Recordkeeping. PLESAs require separate accounting from the rest of the plan. There is a Form 5500 plan characteristic code for plans with a PLESA feature.4

That’s the design. On paper it is a reasonable answer to a real problem. In practice, it hasn’t been adopted.

Almost No One Has Adopted It

This isn’t a soft observation. The data is fairly stark.

Vanguard’s analysis of its administered plans through year-end 2025 found that PLESAs have “generated minimal to no interest from plan sponsors,” and grouped them with Roth employer contributions as the optional SECURE 2.0 features going nowhere. Vanguard’s broader read was that sponsors are prioritizing provisions that support long-term retirement savings and taking a selective approach to short-term liquidity features. For contrast, 91% of Vanguard-administered plans adopted the enhanced age 60 to 63 catch-up limit by the end of 2025. The PLESA did not get that treatment.5

The Plan Sponsor Council of America’s 68th Annual 401(k) Survey shows the same thing. Among plans with 1 to 49 participants, 79.8% said they were not even considering adding a PLESA, and only about 3% had one. That number rises to roughly 90% not considering it for plans with 1,000 to 4,999 participants and 89.2% for plans with 5,000 or more. A separate PSCA poll found that not a single sponsor in the sample was offering a PLESA, though 13% said they were considering it. One sponsor’s recorded response was that they “do not wish to function as a bank.” Another called it an administrative nightmare. That’s the candid version of where the market is.6

The Bipartisan Policy Center and Commonwealth, working through BlackRock’s Emergency Savings Initiative, reached the same conclusion: some sponsors have expressed interest, but most recordkeepers and plan sponsors are hesitant to move forward without legislative and regulatory changes.7

There’s one counterintuitive wrinkle worth noting. The little interest that exists is concentrated in smaller plans, which is the opposite of what you would expect for an administratively complex feature. I won’t over-read a 3% adoption rate, but it’s a data point.

Recordkeepers Are Still Building (Or Choosing Not To)

The adoption problem isn’t purely a demand problem. The supply side is part of the story.

Recordkeepers have been slow to build PLESA functionality because the operational lift is real and the demand signal has been weak. The dynamic is circular. The SPARK Institute, the recordkeeper trade body, has said adoption has been tempered by operational complexity and that more guidance is needed before PLESAs can be widely implemented.8 One law firm’s plain-language summary: because the number of sponsors considering PLESAs has been low, recordkeepers have been reluctant to spend the money to reprogram their systems, and even sponsors who want to lead on this have faced pushback and delays from their recordkeepers.9

Industry consultants have described the same standoff. Recordkeepers are not eager to invest in supporting these accounts without significant sponsor interest, and many recordkeepers that already offer an out-of-plan emergency savings product have little incentive to build the in-plan version that competes with it.10

The friction points recordkeepers keep flagging:

• The HCE exclusion. An employee’s HCE status can change year to year, and tracking who is in and who is out is cumbersome and costly to administer.

• The $2,500 cap is a balance limit, not an annual contribution limit. A contribution limit would be far easier to administer.

• The fee-free withdrawal requirement for the first four withdrawals raises the question of who absorbs that cost.

There’s pending legislation aimed squarely at this. The Emergency Savings Enhancement Act of 2025, introduced by Senators Booker and Young with House companions, would raise the cap from $2,500 to $5,000 and eliminate the HCE exclusion. The explicit goal is to reduce administrative complexity and spur adoption.11 Whether it passes is an open question. I mention it because the people closest to this feature have effectively conceded the current design is too clunky to take off on its own.

Why This Matters: Americans Cannot Absorb a Financial Shock

Set the PLESA aside for a moment and look at the underlying problem it was built to solve.

The Federal Reserve’s 2025 Survey of Household Economics and Decisionmaking, released in May 2026, found that 63% of adults said they could cover a hypothetical $400 emergency expense using cash or its equivalent. That number has been flat at 63% across 2024 and 2025, down from a high of 68% in 2021. Put the other way, more than a third of American adults couldn’t cover a $400 surprise without borrowing or selling something.12

It gets tighter at the bottom. In the Fed’s 2024 data, 18% of adults said the largest emergency expense they could handle using only savings was under $100. Only 55% of adults said they had set aside enough for three months of expenses, and 30% indicated they could not cover three months of expenses by any means.13

The private data tells the same story from a different angle. PwC’s 2026 Employee Financial Wellness Survey found that more than half of employees (53%) have less than $5,000 saved for emergencies, and 30% have less than $1,000. To bridge the gap, 44% use credit cards for necessities and 39% have used payday loans or advances.14

These aren’t numbers about poverty. They are numbers about the median working household. A car transmission, an emergency room copay, a furnace, a security deposit after a move. Any of these clears the threshold of what a third of households can absorb.

When People Cannot Absorb a Shock, They Raid the 401(k)

This is the part that connects directly to retirement planning, and it’s where the actuary in me pays attention.

When a worker has no liquid cushion and an emergency hits, the retirement plan becomes the cushion. The data on plan leakage has been moving in one direction for years.

Vanguard’s How America Saves 2026 report found that 6% of participants took a hardship withdrawal in 2025, a record high. That is up from 4.8% in 2024 and 3.6% in 2023, against a pre-pandemic baseline of about 2%. It was the sixth consecutive annual increase.15 The median hardship withdrawal was about $1,900. The top reasons: avoiding foreclosure or eviction (36%), medical expenses (31%), and tuition (13%).16 Note the size. A $1,900 median withdrawal is exactly the kind of expense a modest emergency fund is designed to absorb. People are reaching into a retirement account to solve a problem a $2,500 sidecar account was built for.

The other half of leakage is the contribution side. When money is tight, the retirement deferral is one of the first things to get cut, because it is discretionary and the participant controls it directly. Plans let participants pause or reduce contributions at any time, and under financial pressure that is a rational short-term move with an expensive long-term cost. A single year of a missed average employer match, compounded over 30 years at 7%, runs into the tens of thousands of dollars in lost balance. The participant rarely sees that tradeoff at the moment they make it.

So the absence of an emergency fund hits retirement security from two sides at once. It pulls money out through hardship withdrawals and loans, and it chokes off contributions going in. Both happen precisely when the participant is least able to recover from them.

There’s evidence the reverse is also true. One emergency savings provider reports that 92% of its users at least maintained their retirement contribution rate over the year, with 32% voluntarily increasing it, roughly double the national average.17 BlackRock’s research on sidecar accounts makes a related point: the presence of an accessible cushion gives people enough sense of control that they are more comfortable committing to long-term saving.18 The cushion does not compete with retirement savings. It protects it.

Emergency Savings Is Part of Retirement Planning

Here’s the conclusion I want plan sponsors, TPAs, advisors, and CPAs to sit with.

An emergency fund is not separate from retirement planning. It is the structural support underneath it. A retirement plan without an emergency cushion behind it is a plan that gets drained and starved every time the household hits a bump, and the data says households hit bumps constantly.

This is why pairing a 401(k) with an emergency savings mechanism makes sense, whether that mechanism is a PLESA, an out-of-plan emergency savings account through a third-party provider, or simply a deliberate financial wellness program that gets people to a starter cushion before pushing them to maximize deferrals. The PLESA is one tool. It happens to be a clunky one right now. But the principle behind it is correct, and the principle does not depend on the tool.

“It Is Not the Business’s Responsibility”

I hear this from owners, and I understand the instinct. A business isn’t a bank. Helping employees save for a flat tire isn’t, on its face, a core function of running a company.

I would reframe it. This isn’t about responsibility. It’s about output.

The PwC 2026 survey found 59% of employees are stressed about their finances right now, and 59% say that stress is negatively affecting their workplace productivity. Financially stressed employees are several times more likely to be distracted at work and report spending multiple hours of work time each week dealing with money problems.19 Other surveys put the lost-productivity figure around seven hours per week per stressed employee and tie financial stress to higher absenteeism and turnover.20

An employee dealing with a financial emergency is not bringing their full attention to your business. They are on the phone with a creditor, calculating which bill to skip, and updating their resume because a job that pays $3 more an hour suddenly matters. That cost lands on the employer whether or not the employer ever offered an emergency savings benefit. The only question is whether the business does anything about it.

A financially secure workforce is a more focused, more present, more loyal workforce. That is not a soft benefit. It shows up in retention, in error rates, in the number of people who are mentally at work while they are physically at work. The businesses that treat financial security as part of the compensation and benefits architecture, rather than as the employee’s private problem, are the ones that get the better version of their workforce.

The Takeaway

The PLESA is a good idea with an awkward implementation. Adoption is near zero, recordkeepers are mostly still on the sidelines, and pending legislation is trying to fix the design. If you are a plan sponsor, I am not going to tell you to rush out and add a PLESA tomorrow. The current rules make it harder than it should be.

But don’t let the clumsiness of this one vehicle obscure the underlying point. More than a third of American workers can’t absorb a $400 surprise. When the surprise comes, they pull money out of their retirement plan or stop funding it, usually at the worst possible time. Emergency savings and retirement security are the same conversation. If you sponsor a plan, advise on one, or run a business with a plan, the emergency cushion belongs on the agenda right next to the deferral rate.

If you want to think through how emergency savings, leakage, and plan design interact for a specific plan, that is a conversation I’m always happy to have.

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Overfunding is one of the most expensive mistakes a Cash Balance (CB) plan sponsor can make. In the worst case, the IRS will take 70% to 98% of the excess. The good news is that overfunding is almost always preventable, and even when it happens, there are several ways to fix it before reversion becomes the only option.

This article walks through how plans become overfunded, what the maximum distributable limit actually is, and the full menu of solutions, ordered from simplest to most complex.

How Plans Become Overfunded

A CB plan becomes overfunded when one of two things happens:

1. The plan sponsor contributes more than the recommended funding amount calculated by Corvus Pension Actuaries each year.

2. Plan assets grow faster than the plan’s actuarial interest crediting rate, which is usually 5%.

Both are avoidable with discipline on contributions and a conservative investment strategy. Both are common when sponsors are not paying close attention.

The Maximum Distributable Limit

The maximum distributable limit, also called the maximum lump sum, is the largest amount a participant is allowed to receive from a CB plan at distribution. It is calculated using a formula defined by the IRS that factors in the participant’s age, the average of their highest 3 consecutive years of wages (the high-3 average), years of plan participation, interest rates, mortality assumptions, and statutory limits.

The illustration below shows the maximum lump sum for a participant aged 62 across various combinations of years of participation and average wages:

For a business owner with a high-3 wage average above $300,000 and at least 10 years of plan participation, the maximum lump sum reaches roughly $3.7 million at retirement age.

The practical takeaway: every plan sponsor should know their participants’ maximum lump sum, and every funding and investment decision should be aimed at keeping plan assets at or below that ceiling.

Reversion: The Worst-Case Scenario

When an overfunded plan terminates and the excess assets cannot be distributed, those assets revert to the plan sponsor. Reverted assets are taxed twice:

1. Income tax. The reversion is treated as taxable income to the company in the year of reversion. Depending on the company’s tax situation, this is 20% to 48%.

2. Excise tax. A 50% excise tax is assessed on the reverted assets under IRC §4980.

Combined, the IRS takes 70% to 98% of the reverted assets. The plan sponsor keeps 2% to 30%. This is why every solution below is worth considering before letting a plan terminate with overfunding intact.

Solutions, From Simplest to Most Complex

1. Prevention

The cheapest solution is the one you implement before there is a problem. Two habits prevent the vast majority of overfunding situations:

Develop a conservative investment strategy. Every CB plan has an interest crediting rate, typically between 4% and 6%. Plan sponsors should know their crediting rate and work with their financial advisor to build a portfolio that targets that rate, not equity-market returns. A CB plan is not the place to chase yield.

Fund the recommended contribution amount. Each year, Corvus prepares an actuarial valuation that includes the allowable funding range and a recommended contribution amount that fully funds the plan benefits. Sponsors who consistently fund above the recommendation will end up overfunded. The valuation exists for a reason.

2. Pay Plan Fees From Plan Assets

Sponsors are permitted to pay Corvus’s administration fees out of the plan rather than out of the company. This is a small lever, but it does two useful things at once: it lowers the company’s expenses and it draws down plan assets. For a plan with minimal overfunding, this alone can be enough to keep the situation under control.

3. Wait

The maximum distributable limit increases with each additional year of plan participation, up to 10 years. If the participant has fewer than 10 years of participation, simply continuing to operate the plan increases their ceiling. Doing nothing is sometimes the right move.

4. Increase Wages

Because the maximum lump sum depends on the participant’s high-3 average wage, raising wages raises the ceiling. If the participant’s historical wages have been below the IRS compensation limit and the company can afford to pay them more, increasing wages for 3 consecutive years establishes a new high-3 average. After that, wages can be brought back down. The increased ceiling stays in place.

5. Add Family Members to the Plan

Business owners can hire spouses, children, parents, or siblings, pay them legitimate wages, and accrue plan benefits for them. This reduces overfunding while building retirement security for family members. The wages and the work performed need to be real and reasonable. The IRS does not look kindly on a “Vice President of Strategic Planning” who is in second grade.

6. Qualified Replacement Plan (QRP)

When the solutions above are not enough, the IRS allows the plan sponsor to roll overfunded assets into a Qualified Replacement Plan. The QRP is a 401(k) plan that covers at least 95% of the participants from the CB plan. The overfunded assets are deposited into an unallocated account in the 401(k) plan and allocated to participants over 7 years.

This requires the sponsor to maintain the 401(k) plan until the unallocated assets are fully distributed. Our office has used this approach more than 20 times. For overfunding under $1M, it is usually the right answer.

7. Business Transaction

When overfunding exceeds $1,000,000 and the solutions above will not close the gap, the remaining option is to include the overfunded plan in a business sale to a non-profit that sponsors an underfunded defined benefit plan.

Here is how it works:

1. The business owner forms a new business entity and changes the plan sponsor of the CB plan to that new entity.

2. Because the new entity does not employ the original plan participants, those participants can be distributed from the plan.

3. The business owner sells the new entity, along with other business assets, to the non-profit. If no business assets other than the CB plan are included in the sale, the strategy is not allowable under ERISA. This is not optional.

4. The non-profit values the CB plan assets at 70% to 85% of market value, reflecting the difficulty of removing assets from the plan.

5. The sale is structured as a stock sale, so the business owner pays 20% capital gains tax on the proceeds.

The result: the business owner walks away with 56% to 68% of the original overfunding. Compare that to the 2% to 30% they would keep after a reversion. The non-profit, meanwhile, solves part of its underfunding problem at a discount, since non-profits do not get tax deductions for retirement plan contributions and a discounted asset transfer is genuinely valuable to them.

This is a complex transaction. It requires the right counterparty, careful legal structuring, and coordination between the plan sponsor, the non-profit, and the actuarial firm. It is not the first solution to reach for. But when nothing else will close the gap, it is dramatically better than reversion.

Corvus has a network of attorneys, business brokers, and non-profits to facilitate these transactions and has completed 2 of these in the past.

The Bottom Line

Overfunding is a problem that compounds quietly. By the time a plan sponsor notices, the easy fixes may not be enough. The right approach is to know your maximum distributable limit, fund the recommended contribution, target the interest crediting rate with a conservative investment strategy, and check in on the plan’s funded status every year.

If your CB plan is already overfunded, or you are worried it might be heading that way, there is almost always a path that beats reversion. The earlier we look at it, the more options are on the table.

Cash balance (CB) plans are defined benefit plans that can dramatically increase how much a business owner puts away for retirement each year, all of it pre-tax. I’ve worked with over a thousand small businesses over my 13+ years as an enrolled actuary, and CB plans consistently deliver the largest tax reduction per dollar spent of any retirement vehicle available to closely held businesses. Here’s what you need to know.

What Makes a Cash Balance Plan Different

A CB plan is a defined benefit (DB) plan, but it doesn’t work like the traditional pension most people picture. Instead of expressing your benefit as a monthly annuity payment in retirement, a CB plan credits each participant with a hypothetical account balance that grows at a fixed interest rate set in the plan document, typically 5% per year. That makes it much easier for participants to understand the current amount of the plan benefit.

The big difference from a traditional 401(k) is the contribution limit. A 50-year-old business owner maxing out a 401(k) with profit sharing can contribute up to $80,000 for the 2026 year. Add a CB plan on top of that, and the deductible contribution for that same person can increase by $200,000 or more annually. By their late 50s, the combined number can push past $380,000 per year. All of it is deductible.

For a business owner in a high tax bracket, that’s not a retirement plan. That’s a tax strategy with a retirement plan attached.

The Case for a CB/401(k) Combo

CB plans work especially well when paired with an existing 401(k) plan. Our office designs combo plans that maximize the CB contribution for the business owner while minimizing the cost to employees. Done correctly, this structure lets owners capture the full tax benefit of a CB plan while keeping overall plan costs predictable and manageable.

This matters because a poorly designed combo plan can shift a disproportionate share of the funding obligation toward rank-and-file employees, erasing much of the tax benefit for the owner. Plan design here isn’t a formality. It’s where the value is created or lost.

A Few More Features Worth Knowing

Predictable growth. CB plan account balances grow at the plan’s interest crediting rate, generally 5% per year. Traditional DB plan lump sum values fluctuate based on the interest rate environment, which creates uncertainty for participants. The CB structure eliminates most of that volatility.

ERISA creditor protection. Qualified plan assets, including CB plan balances, are shielded from creditors under ERISA in most cases. For business owners operating in fields with liability exposure, this is a meaningful layer of protection that a taxable brokerage account simply can’t provide.

What CB Plans Require

CB plans are more complex to administer than 401(k) plans. Before setting one up, plan sponsors should understand what’s involved.

An enrolled actuary. Every CB plan requires an annual actuarial valuation certified by an enrolled actuary (EA). This isn’t optional, and it’s not something a CPA or financial advisor can handle without that credential. Plan sponsors need to budget for this as an ongoing administrative cost.

Minimum funding obligations. Unlike a 401(k), where contributions are discretionary, CB plans have a minimum required contribution each year. There’s also a maximum deductible contribution. Plan sponsors can fund any amount within that range, but the minimum must be met regardless of how the business is performing.

Annual Form 5500 filing. CB plans must file a Form 5500 with the IRS and DOL annually. This is similar to 401(k) reporting requirements, but CB plans carry additional actuarial schedules that increase the complexity of the filing.

Conservative investments. CB plan assets should be invested with a conservative strategy targeting approximately 5% annual growth. Large investment gains or losses create real problems. If the plan earns significantly more than the interest crediting rate over time, the plan can become overfunded to the point where assets exceed the maximum amount that can be distributed to participants. That’s a problem with no clean solution. If the plan loses significantly, the plan sponsor may face unexpectedly large minimum contribution requirements. We recommend that plan sponsors work with their financial advisors to build an investment strategy specifically designed for their CB plan.

The maximum distributable limit. Each participant in a CB plan has a maximum distributable limit based on their age, years of service, and compensation history. Plan sponsors should monitor this limit in coordination with their actuary. If plan assets grow beyond this limit, the excess generally cannot be distributed to participants and triggers additional excise tax exposure.

Is a CB Plan Right for Your Business?

CB plans work best for profitable small businesses with stable cash flow, a relatively small number of employees, and an owner who wants to significantly accelerate retirement savings. They’re also well-suited to professional practices, including medical, dental, legal, and accounting firms, where income is high and the workforce is lean.

They’re not the right fit for every situation. If cash flow is unpredictable, the minimum funding obligation can become a source of stress rather than a benefit. That’s why I always recommend working through the numbers before committing to a plan.

If you think a CB plan might be worth exploring for your business, I’m happy to discuss whether the structure makes sense given your specific situation. Our office never charges for proposal work, so there’s no cost to finding out.

Zachary Dennis, EA, MSEA is the President and Chief Actuary at Corvus Pension Actuaries, LLC. Corvus specializes in the design and administration of Cash Balance and Defined Benefit plans for small businesses.