Why there is a combined limit at all
When a business sponsors both a defined benefit plan and a defined contribution plan covering the same person, IRC 404(a)(7) caps the total it can deduct across both. The cap is the greater of:
- 25% of the pay of the people covered, or
- what the defined benefit plan needs to meet its minimum funding requirement.
Plans insured by the Pension Benefit Guaranty Corporation are exempt from this cap. A plan covering only the owner, or the owner and spouse, is not insured, so for a one-person business the cap applies. The details are in the glossary entry on the combined deduction limit.
The 6% of pay rule
Two carve-outs make the cap much less restrictive than it first looks. First, if the business's contributions to the 401(k), other than your deferrals, are no more than 6% of pay, the combined limit does not apply at all: not to the 401(k) money and not to the cash balance contribution. Second, if they go above 6%, only the amount above 6% is counted against the cap alongside the cash balance contribution.
So the usual design is simple: fund the cash balance plan with whatever the actuary's range allows, and keep the 401(k) employer contribution at or under 6% of pay. At pay of $360,000 or more (the most a plan can count in 2026), 6% is $21,600.
If the cash balance contribution is small, at or below 25% of pay, the arithmetic changes. The cash balance contribution plus the 401(k) employer contribution above 6% can then reach 25% of pay, which is why this is sometimes described as a 31% limit. That mostly matters for younger owners, whose cash balance figures are lower.
Why your deferrals don't count
Elective deferrals, the part of your pay you choose to put into the 401(k), are outside the combined limit entirely (IRC 404(n)). They are not counted toward the 6% and they do not reduce the cash balance deduction. You can defer the full $24,500 in 2026, plus a catch-up of $8,000 from age 50 or $11,250 at ages 60 to 63, whatever the cash balance plan holds.
If the only thing going into the 401(k) is deferrals, the combined limit does not apply at all. Deferrals do still count toward the 401(k)'s own $72,000 annual additions limit, catch-ups aside.
S corporations and C corporations
For an owner paid through payroll, "pay" means W-2 wages from the business, capped at $360,000. Distributions and K-1 income never count. The 6% is simply 6% of those wages.
| Contribution | Amount | Who deducts it |
|---|---|---|
| Cash balance plan | $150,000 | The corporation |
| 401(k) profit sharing at 6% of pay | $12,000 | The corporation |
| Your salary deferral | $24,500 | You, through lower W-2 taxable wages |
| Total | $186,500 |
Wages are fixed on December 31. After that, the 6% cannot be raised by adding pay, and the deferral has to have come out of paychecks during the year. See S corporation owners.
Sole proprietors and partners
For the self-employed, "pay" is earned income: net profit less half of self-employment tax, less the plan contributions themselves. Because the cash balance contribution reduces earned income, it also reduces the 6% that can go into the 401(k). The larger the cash balance contribution, the smaller the profit-sharing room.
Because the profit-sharing contribution also reduces earned income, the most it can be is 6/106, a little under 6%, of what remains after the cash balance contribution. There is also an outer limit: the total deducted across both plans cannot exceed earned income before those contributions (IRC 404(a)(8)(C)).
| Contribution | Amount |
|---|---|
| Cash balance plan | $150,000 |
| 401(k) profit sharing, 6% of what remains | $7,616 |
| Your salary deferral | $24,500 |
| Total, deducted on your Form 1040 | $182,116 |
The self-employed deduct these on Schedule 1 of Form 1040, not on Schedule C, so they reduce income tax but not self-employment tax. See sole proprietors and single-member LLCs.
What happens if you go over
If the 401(k) employer contribution goes above 6% of pay while the cash balance contribution is large, the excess is generally not deductible that year. It carries forward, and nondeductible contributions are subject to a 10% excise tax under IRC 4972, with some elections available to reduce it. The fix is to agree the numbers for both plans before either is funded.
A SEP IRA contribution for the same year counts as an employer defined contribution too, and uses up the same 6%. See cash balance plan vs SEP IRA.
Running the two plans
- Each plan has its own document and its own trust, and each trust needs its own tax ID.
- The assets of both plans are added together for the $250,000 Form 5500-EZ test. Once the total passes it, each plan files.
- The cash balance contribution range comes from the actuary each year. The 401(k) figure is then set to fit around it.
Maxed does not set up Solo 401(k) plans yet, but every estimate accounts for one. You can see both plans together in the comparison calculator.