Pension Rescue
Your Cash Balance Plan Is Overfunded. Here's How the Deduction Comes Back
July 22, 2026 — 6 min read
The call usually sounds the same: the CPA has run the return, the pension deduction the owner budgeted $250,000 for has collapsed to almost nothing, and there are weeks left in the year. Nothing went wrong. The investments did too well.
Why good returns kill the deduction
The plan credits participants a fixed interest rate — often 3% to 5% — written into the document. If plan assets earn 14%, the surplus does not increase anyone's benefit. It reduces the funding the actuary says is still needed. Do that for three or four strong years and the plan is fully funded ahead of schedule, which means the maximum deductible contribution approaches zero.
What you cannot do about it
- You cannot simply contribute anyway — contributions above the deductible limit carry a 10% excise tax under IRC 4972.
- You cannot pull the surplus out at termination without a reversion tax that commonly runs 50% when combined with income tax.
- You cannot quietly raise the crediting rate mid-stream without following amendment and anti-cutback rules.
Actuarial defunding, plainly
The lever that works is the plan's expected yield. Move a portion of plan assets into guaranteed instruments — typically whole life contracts with a guaranteed rate near 3% — and the portfolio's forward-looking return assumption falls. A lower assumed yield means the actuary projects a larger shortfall against the promised benefit, which mathematically reopens deductible contribution room.
This is not an investment recommendation dressed up as tax planning. It is a yield suppressor deployed for a specific compliance outcome.
The incidental benefit guardrail
If the plan holds life insurance, it must stay incidental under Rev. Rul. 2004-20 and related guidance: broadly, premiums under 50% of aggregate contributions for whole life, and 25% for term or universal. The participant reports only the economic benefit cost as income each year. Exceed the thresholds and the plan risks disqualification — the exact opposite of the goal.
Timing
The valuation date and the corporate filing deadline set the window. Contributions can generally be made up to the extended due date of the return and still count for the prior plan year, but the plan amendments and asset repositioning that create the room take longer than a wire transfer. Practically, an overfunding problem discovered in Q4 is fixable; one discovered after the extended deadline is a lost year.