Solo 401(k) vs. cash balance plan: which fits a physician?

Most physicians reach their peak earning years with a large income, a high tax bracket, and a late start on saving, because residency and fellowship push serious retirement contributions into your mid-30s or later. The tax code offers two tools that fit this situation unusually well. A Solo 401(k) is simple, flexible, and covers the first $72,000 or so. A cash balance plan is more involved, but for a doctor in their 40s, 50s, or 60s it can turn a six-figure tax deduction into an annual event. Here's how each works and how we decide between them.

Who qualifies for a Solo 401(k)

The IRS calls it a one-participant 401(k) plan: an ordinary 401(k) covering a business owner with no employees, or the owner and their spouse. It isn't a special plan type; it's the standard plan with the testing and paperwork stripped away because there's nobody to discriminate against.

For physicians, the qualifying income usually comes from somewhere other than the main job:

• 1099 income from locum tenens work, moonlighting, call coverage, or a medical directorship
• Expert witness, consulting, or speaking fees
• A solo practice or a professional corporation you own and work in alone

You can have a Solo 401(k) for that side income even while you participate in a hospital's 403(b) or 401(k). The catch is that the elective deferral limit is per person, not per plan, so whatever you defer at the hospital counts against the same cap. The employer contribution, on the other hand, is computed separately for each unrelated employer, which is where the room is.

The qualification is fragile in one direction. The moment you hire a staff member who meets the plan's eligibility rules, the plan has to cover them and nondiscrimination testing returns. Under the long-term part-time rules, even employees working 500 hours a year for two consecutive years must be allowed to defer. If a practice has a nurse, a medical assistant, or a front-desk employee, the Solo 401(k) is no longer solo.

The 2026 contribution limits

The IRS sets the dollar limits each fall and publishes them in its cost-of-living adjustment table; the 2025 figures below came from Notice 2024-80. For 2026 they are:

• Elective deferral: $24,500 (2025: $23,500), plus an $8,000 catch-up at age 50 and over (2025: $7,500). Participants who turn 60 through 63 during the year get $11,250 instead.
• Total annual additions (employee plus employer): $72,000 (2025: $70,000), not counting catch-up contributions. With the catch-up, a 55-year-old can reach $80,000.
• Compensation that counts: $360,000 (2025: $350,000).
• Employer contribution: up to 25 percent of compensation. For a sole proprietor the math is done on net earnings after half the self-employment tax and the contribution itself, which works out to roughly 20 percent of net profit.

The 2025 figures were slightly lower, but the structure is the same.

Beyond the numbers, contributions are discretionary (a lean year costs you nothing), a Roth deferral option is available, and no annual return is required until plan assets reach $250,000, after which a short Form 5500-EZ is filed. The ceiling is the limitation: for a physician netting $400,000 from a side practice at 52, $80,000 is meaningful, but everything above it is taxed in the top brackets.

How a cash balance plan works

A cash balance plan is a defined benefit pension plan dressed up to look like an account. Each participant has a hypothetical balance that grows by two credits a year: a pay credit (a flat dollar amount or percentage of pay set in the plan document) and an interest credit (a fixed rate or a rate tied to Treasury yields). At retirement, the balance is usually rolled into an IRA.

Because it's a defined benefit plan, the limit works differently. The code doesn't cap the contribution; it caps the benefit the plan can pay. Under IRC §415(b), the maximum annual benefit for 2026 is $290,000 per year starting at age 62 (indexed; $280,000 for 2025). An actuary works backward from that benefit to the contribution needed each year to fund it by retirement age.

That's where age comes in. A 35-year-old has 27 years of compounding to reach the target, so the annual funding is modest. A 55-year-old has seven. The same benefit requires a much larger annual contribution, and the tax code allows it. For owners in their late 40s and up, annual deductible contributions well into six figures are routine, and for an owner in their late 50s or early 60s they can approach or exceed $300,000 a year, all of it an above-the-line deduction for the business.

Why physicians in their 40s to 60s stack both plans

The usual design isn't either/or. It's a 401(k) with profit sharing plus a cash balance plan, and the two are coordinated.

When a business sponsors both a defined contribution and a defined benefit plan, IRC §404(a)(7) limits the combined deduction, with an exception for employer 401(k) contributions of up to 6 percent of compensation. Owner-only plans aren't insured by the PBGC, so they don't get the broader exception larger employers use. The practical result is a standard layout:

• Full elective deferrals ($23,500 plus catch-up)
• An employer profit-sharing contribution of 6 percent of compensation
• The cash balance contribution on top

For a 54-year-old physician with $350,000 of W-2 compensation from her own S corporation, that can mean roughly $52,000 into the 401(k) side and a cash balance contribution of $150,000 or more, depending on the actuarial design. The combined deduction cuts her federal tax by something on the order of $70,000 in a single year, and Texas adds no state income tax to the calculation. Over a decade of peak earning, that's a retirement account built largely out of money that would otherwise have gone to the IRS.

For S corporation owners, contributions are based on W-2 wages, not distributions, so the reasonable salary decision and the plan design have to be made together, and the deduction's effect on the Section 199A calculation belongs in the same model.

The commitment you're signing up for

A cash balance plan is a pension, and the law treats it as one. Before adopting one, understand what you're agreeing to:

• Funding is required, not optional. The minimum funding standards in IRC §412 and §430 apply. A plan can be designed with a range of acceptable contributions, and it can be amended, but you can't simply skip a bad year the way you can with profit sharing. If your income is volatile, that matters.
• An actuary is part of the team. The plan needs an enrolled actuary to compute the contribution each year and certify it on Schedule SB of the annual Form 5500. Expect setup and annual administration fees that are a small fraction of the tax saved, but real.
• The business bears the investment risk. The plan promises the interest credit. If the investments earn less, the shortfall increases future contributions; if they earn more, future contributions shrink.
• It has to be meant to last. The IRS expects a qualified plan to be permanent. A plan opened and closed within a few years, with no business reason for the change, invites scrutiny. Most practitioners plan on a minimum horizon of several years.
• Employees must be covered. If the practice has staff, they participate too, and nondiscrimination testing usually requires employer contributions on their behalf. In a typical small-practice design the owner still captures the large majority of the total contribution, but staff costs are part of the price.

None of these are reasons to avoid a cash balance plan. They're reasons to adopt one deliberately.

How we decide

For physicians and other medical professionals, the choice usually falls out of five questions:

1. Do you have employees? None (or only a spouse) points to a Solo 401(k) first. Staff doesn't rule out either plan, but it changes the cost.
2. How much do you want to shelter? If the answer is under about $70,000 to $80,000 a year, a Solo 401(k) alone is enough. Above that, a cash balance plan is the only way to get there.
3. How old are you? The older the owner, the larger the cash balance contribution the actuary can justify.
4. How steady is the income? Cash balance plans suit practices with predictable profit. A 401(k) suits income that swings.
5. What's the horizon? A planned exit in two years argues against a pension.

When the answers point to a cash balance plan, we coordinate the design with the S corp salary, the profit-sharing layer, and the rest of your tax plan, then work with the actuary and plan administrator to get it adopted before year-end.

This article is general information, not tax or investment advice for your situation. Talk with a CPA and a plan actuary before adopting or amending a retirement plan.