Even before the tax law, the popularity of cash balance plans was surging for small business owners. There were 20,500 such plans in 2016, up almost threefold since 2010, according to Kravitz estimates based on Internal Revenue Service data. The majority are run by businesses with fewer than 10 employees; 37 percent of plan holders were doctors or dentists, while 10 percent were accounting, finance or insurance firms and nine percent were legal firms.

The interest is a change for the traditional pension plan, which has been slowly dying after most big U.S. employers replaced guaranteed retirement benefits with less-costly 401(k) retirement accounts.

Defined-benefit pensions can shield more income from the IRS than a 401(k)-style defined contribution account or individual retirement account, or IRA. Annual employee contributions are capped at $18,500 this year for 401(k)s and $5,500 for IRAs for those under 50.

A cash balance pension is the “next logical step” for successful business owners who are already funding their 401(k) profit-sharing plans up to their limits and want to avoid taxes by deferring even more income, said Keith Steidle of Steidle Pension Solutions, a small plan administrator based in New Jersey.

A 61-year-old married doctor with a practice earning $650,000 a year could set up a defined-benefit pension to get his taxable income under $315,000. He could put $268,000 in a cash balance pension, in addition to putting money in his 401(k) and contributing to employee retirement accounts, and get down to an effective tax rate of 20 percent, according to Kravitz’s calculations.

After several years of saving in a cash balance plan, recipients generally roll their account balance into an IRA and manage the money themselves. Most choose to do so since the IRA is a more cost-effective vehicle and they can invest more aggressively than in a cash balance plan. There’s no limit on how much users can roll over. They don’t pay taxes until they pull the money out, typically when they’re in retirement and in a much lower tax bracket.

Lower-Paid Employees
The rich aren’t the only ones who can benefit from the pension workaround. Like other retirement plans, defined-benefit plans are governed by regulations, called non-discrimination rules, that require owners to spread at least some retirement wealth to lower-paid employees.

The rules depend on the age and income levels in a workforce, but typically setting up a cash balance pension for a business’s owner will require a profit-sharing retirement contribution for middle-class employees equal to about 7.5 percent of their salaries. A cash balance plan can be too expensive, therefore, for larger businesses with many low earners.

For small, profitable professional businesses, however, the vast majority of the benefit can usually go to owners, not employees. If the doctor’s office that brings in $650,000 employs four people earning from $21,000 to $51,000 a year, retirement rules dictate that those four employees would split an annual retirement contribution from the doctor of $13,825.

Setting up a cash balance plan isn’t the right strategy for every business. Owners must be sure of stable, consistent profits before they commit to funding several years of pension contributions, said Jamie Hopkins, a professor at the American College of Financial Services.