Apollon Wealth Management on a Cash Balance Plan for Business Owners and the Sale Date

When the SEP-IRA is full and profit keeps coming

A cash balance plan is a defined benefit plan. Each participant's account gets a pay credit and an interest credit every year, the company funds it, and an enrolled actuary certifies the required contribution annually under minimum funding rules.

It starts to matter once you already put in the most a defined contribution plan allows ($72,000 total under section 415(c) for 2026, per the IRS) and still have profit taxed at 37 percent. For a married couple that means joint taxable income above $768,700 in 2026. Cash balance credits sit outside that $72,000.

Age drives the size. The plan funds a benefit by retirement age, so a 63-year-old owner with few years left gets much larger credits than a 45-year-old. That makes it mostly a tool for owners in their 60s.

And it's a commitment. The contribution is required every year the plan runs, and the IRS expects a plan to be permanent, so treat it as a decision of three years or longer. A SEP-IRA you can skip in a slow season. This you can't.

How much of the deduction is a real saving?

Only the gap between today's tax rate and the rate you'll pay on withdrawal is a lasting saving, minus what staff credits cost. A deduction taken at 37 percent and withdrawn at 37 percent just moves the tax, apart from tax-deferred growth.

Staff credits are real money leaving the owners. At a 37 percent rate, each $1 of staff credit costs $0.63 after the deduction. For a company with 40 employees, that's the line that decides the plan.

A hypothetical couple, Gus (63) and Deborah (60), own a commercial landscaping company with 40 employees and about $700,000 in a SEP-IRA. They weigh a $6 million private-equity offer against a ten-year sale to their son. Joint taxable income is above $768,700. In October, after Deborah sends the payroll census, they open the actuary's design illustration. It shows pay credits of $200,000 for Gus, $150,000 for Deborah and $60,000 across eligible crew members: $410,000, all deductible.

At 37 percent, this year's tax cost falls by $151,700 ($410,000 × 0.37). But the owners' $350,000 is taxed again on the way out. If that happens at an average 20 percent, for illustration, the lasting saving is 17 percent of $350,000, or $59,500. The staff's $60,000 costs $37,800 after the deduction ($60,000 × 0.63). Net lasting gain: about $21,700 per year ($59,500 minus $37,800).

So $151,700 of relief this year shrinks to roughly $21,700 of lasting gain. If their withdrawal rate rose to 25 percent, the owners' piece would fall to $42,000 and the plan would barely cover the staff cost.

The yearly 415(b) benefit limit, set by the IRS, is reduced by one-tenth for each year of participation under ten. A plan that runs three years before a private-equity closing can pay Gus at most three-tenths of the dollar limit. The actuary sizes credits to the years the plan will really run.

Plan assets are invested, and returns are never certain. If the account falls short of the promised credits, the company owes the difference.

Where the $410,000 goes

Why the plan's length caps the benefit

What age turns the same question into a different answer?

Age and cash certainty change the answer because the plan needs steady funding for at least three years and enough years left to build a meaningful benefit. Two owners can ask the same thing and leave with opposite advice.

Raj, a hypothetical 47-year-old, asks whether to add a plan before his partner leaves. The $2 million buyout has no funding behind it within two years, and a required yearly contribution would compete for the same cash. Our answer: fund the buyout first, revisit the plan after it closes.

Merle, a hypothetical 68-year-old, asks the same before selling his machine shop to long-time employees in about three years. A small plan can make sense. But three years of participation cut his 415(b) limit to three-tenths, his employees get credits too, and the rollover lands in IRAs that already face required minimum distributions at 73. We would keep credits modest.

Certainty of cash for the next three years, and the number of years until the sale, decide whether the plan opens. The size of the deduction doesn't.

Four pages from the actuary, read in plain English

A finished piece of this work is short. It's the actuary's illustration listing each participant's pay credit, the minimum and maximum contribution for the year, and the deadline calendar. On top of that sits our one-page note showing this year's change in tax cost, the lasting saving after staff cost, and what happens to the plan under each sale path: closing with the private-equity buyer, or selling to the son over ten years.

How long does it take from payroll census to first deposit?

The length depends mostly on how fast the payroll census arrives, since the actuary can't design anything without birthdates, hire dates, hours and pay. Adoption can happen as late as the extended due date of the company's return, so a late start isn't automatically a missed year.

First, we read the business and personal returns for the past two years, the SEP-IRA year-end statement and the census. We confirm the owners already contribute the most the SEP allows and sit in the 37 percent bracket.

Then the actuary or plan administrator runs the design. That includes how the SEP fits under the combined deduction limit (many owners stop or replace it) and, since a landscaping company is not a professional service employer, the PBGC premiums the plan will likely owe. We test the result the way the worked example does.

Next we place the plan on the sale timeline, one decision at a time, by deadline. A private-equity closing usually means terminating before close and rolling lump sums to IRAs (Deborah must sign spousal consent for Gus's lump sum). A ten-year sale to the son lets the plan continue.

Last, at each progress meeting we compare the year's profit with the contribution range, pick a figure inside it, and track the Form 5500 and minimum contribution dates from the calendar.

Steps one and two: the numbers

Steps three and four: the timeline

The mistake that sends plan money back to the company

Investing the plan for returns well above its interest crediting rate costs nothing in the year the deduction is taken. But if the plan terminates after three years, assets beyond what Gus's reduced 415(b) limit lets him take out can revert to the company, taxed as income and hit with an excise tax of up to 50 percent.

A cash balance plan also does nothing to cut what you owe when the company itself is sold, and it is a deferral. Some owners usually do better waiting or skipping it: those with uneven profit, a large staff relative to the owners, or a closing expected inside about two years. Business sale tax planning is a separate piece of work.

What the first call with Apollon Wealth Management covers, and what to bring

We talk through ages, profit, staff makeup, the SEP-IRA and the likely sale date. Bring the business and personal returns for the past two years, the payroll census, the SEP-IRA year-end statement and any letter of intent from a buyer.

Apollon Wealth Management works with clients with $500K or more in investable assets. Every fee is listed in the client agreement, and nothing outside that list is charged. We don't publish a phone number, so please contact us through the request form. We hold every meeting by phone or video.