Unlock Massive Tax Savings with Cash Balance Defined Benefit Plans – David Podell

High-income owners are often stuck between a rising tax bill and the need to supercharge retirement savings. In this episode of Building the Premier Accounting Firm, host Roger Knecht sits down with retirement plan specialist David Podell to unpack how Cash Balance and Defined Benefit (DB) plans can deliver substantial, recurring tax deductions—while staying compliant and employee? friendly.

Why Consider a Cash Balance / Defined Benefit Plan?

Unlike a traditional 401(k), Cash Balance/DB plans use actuarial math to target a future benefit and back into today’s contribution needs. For profitable firms, that structure frequently supports significantly higher deductible contributions than a defined contribution plan alone—accelerating retirement funding and cutting current taxes. When paired with a 401(k)/profit sharing plan and designed correctly, these strategies keep testing clean while tilting more value to the owner(s).

Meet the Guest: David Podell

David Podell specializes in DB plan design, actuarial funding, and compliance. In conversation with Roger, he lays out how the right plan design, coordinated with W-2 compensation and 401(k)/profit sharing, can create owner-favorable outcomes without violating coverage or nondiscrimination testing.

How Cash Balance / DB Plans Work (Plain-English)

A Defined Benefit plan promises a specified benefit at retirement. The actuary translates that future promise into a current-year contribution range, which is often higher for older owners or those with shorter time horizons. That’s why DB plans can unlock larger deductions—especially when layered with an existing 401(k) + Profit Sharing plan.

Key ideas:

• Age-weighted, actuarially determined contributions

• Higher potential caps than 401(k)-only approaches

• Works best when paired with a 401(k)/Profit Sharing plan

Who’s a Good Candidate?

Firms with:

• Consistent profits and stable cash flow

• Ability to commit to contributions over a multi-year horizon

• Willingness to coordinate W-2 “reasonable compensation” with plan design

• An employee census (headcount and comp) that tests cleanly

Industries that often fit: medical/dental, legal, engineering, accounting, consulting, and other professional services.

Owner-Weighted Outcomes—Compliantly

A hallmark of well-crafted designs is that a large share of total plan value can accrue to owners while providing appropriate, compliant benefits to eligible staff. That owner-enhanced outcome comes from:

• Calibrating the DB formula and 401(k)/Profit Sharing formula together

• Setting W-2 pay at levels that coordinate with testing

• Using safe harbor and targeted profit sharing to satisfy coverage/nondiscrimination rules

Takeaway: the design and testing—not guesswork—determine the owner/staff allocation.

The 3-Plan Stack: Cash Balance + 401(k) + Profit Sharing

Stacking a Cash Balance plan on top of 401(k) + Profit Sharing is a proven pattern because it:

• Layers contribution limits to expand deductible room

• Uses the 401(k)/PS plan to help DB testing pass cleanly

• Often maximizes total owner contributions and deductions

Close coordination among your actuary, TPA, CPA, and payroll is essential.

Funding Windows & “By Extension” Opportunities

Timing matters. Subject to rules and deadlines, DB plans can often be set up and funded by the business tax-return extension, allowing owners to capture a deduction for the prior tax year. This makes DB plans useful for both long-term and year-end/post-year-end tax planning—provided you plan early and align with your advisors.

Flexibility: Freezes, Corridors, and Multi-Year Planning

Cash flow isn’t static. Thoughtful designs provide flexibility:

• Temporary plan freezes can pause new accruals during lean periods

• Contribution ranges (corridors) provide year-to-year wiggle room

• A multi-year (often 3–5 year) horizon keeps funding realistic while meeting goals

The objective is to sustain the tax strategy and retirement funding pace without overcommitting.

Employees: Coverage, Vesting & Costs (Deeper Dive)

Designing an owner-friendly plan still requires meaningful benefits for eligible staff. In practice:

• Staff benefits are frequently delivered through the 401(k)/Profit Sharing companion plan

• Vesting can be structured to encourage retention while remaining fair and compliant

• The employee census (ages, pay levels, tenure, part-time/full-time mix) materially affects testing and employer cost

• Annual data hygiene—accurate headcount, eligibility dates, and compensation—is vital for clean tests and audits

How to manage expectations with your team:

• Explain the employer-funded nature of DB benefits and the separate 401(k) match/profit sharing

• Publish a simple eligibility/vesting explainer so staff know what to expect

• Revisit staff costs and formulas annually to keep testing smooth

Risk Management, Compliance & Your Advisory Team (Deeper Dive)

DB plans are highly effective when governed carefully:

• Actuary: designs the formula, calculates the annual required (and maximum) contribution ranges, and signs valuations

• TPA: produces plan documents, runs coverage/nondiscrimination tests, tracks eligibility/vesting, files required forms

• CPA/Tax advisor: aligns deductions, entity strategy, and extension timing with the plan’s funding schedule

• Payroll & HR: maintain precise W-2 compensation, eligibility dates, and job status changes

Common avoidable issues:

• Mismatched census data (incorrect hours/pay/eligibility) ? testing failures or audit flags

• Late funding or missed filings ? penalties and administrative headaches

• Uncoordinated W-2 comp ? suboptimal owner outcomes or failed tests

A simple governance calendar (valuation, testing, funding, filings) combined with quarterly check-ins across actuary/TPA/CPA keeps the plan on track.

Comparisons & Misconceptions (Deeper Dive)

• “Why not just take dividends?”
  Dividends can distribute cash but don’t generate the qualified plan deduction or accelerate retirement balances the way a DB plan can.

• “Is key-man insurance the same thing?”
  No. Insurance is a risk-transfer tool, not a qualified retirement vehicle. It can complement a plan but doesn’t replace deductible contributions.

• “Non-qualified deferred comp instead?”
  Useful in some contexts, but carries employer balance-sheet risk and different tax timing. A DB plan is a qualified structure with established deduction rules.

• “A 401(k) is enough for us.”
  Sometimes true—especially with volatile profits or demographics that don’t test well. When profit is stable and age profiles line up, adding DB can materially increase deductible space.

Implementation Roadmap (Practical & Detailed)

1. Eligibility Screen & Goals

   • Confirm profitability and cash-flow stability

   • Align owner goals (tax reduction, retirement targets, timeline)

2. Census & Compensation

   • Gather full employee census (DOB, DOH, hours, pay)

   • Confirm W-2 “reasonable comp” strategy with CPA/payroll

3. Preliminary Design & Testing

   • Actuary/TPA model DB formula + 401(k)/Profit Sharing

   • Review owner/staff allocations, employer cost, and testing results

4. Refine & Decide

   • Tune plan formulas, eligibility, and vesting

   • Validate funding ranges and contingency plans (freeze option)

5. Documents & Set-Up

   • Finalize plan documents and employee notices

   • Establish funding timeline and administration calendar

6. Fund & File

   • Coordinate funding windows (including potential by extension)

   • Complete required filings and valuations

7. Operate & Review Annually

   • Keep census data pristine

   • Re-test, re-forecast contributions, and revisit W-2 comp as needed

Case Pattern to Learn From (Tightly Grounded)

Professional service firms with multiple partners and mixed ages often see strong results when they:

• Pair Cash Balance with 401(k) + Profit Sharing

• Coordinate W-2 comp and eligibility to keep tests clean

• Use funding-by-extension in year one (where allowed) to capture prior-year deductions

• Plan on a multi-year horizon with corridors and a freeze option for downturns

The practical outcome is typically material, repeatable deductions and a disciplined path to retirement funding—without sacrificing compliance.

Valuation & Exit Considerations (What to Watch)

For owners contemplating a sale, confirm with your M&A and tax advisors how DB contributions will be viewed in quality-of-earnings and whether they may be treated as add-backs in certain analyses. Be proactive so the plan supports your exit narrative rather than complicating it.

Final Thought & Next Steps

As discussed by Roger Knecht and David Podell, successful DB implementations are process-driven: accurate data, thoughtful design, clear funding timelines, and a coordinated team. When those pieces are in place, Cash Balance/DB plans become a cornerstone strategy—reducing taxes today while fast-tracking tomorrow’s retirement.

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