For many high-income business owners and paid board members, the frustration is familiar. Year after year, income grows but the traditional tools available to shelter that income do not keep pace. Even with a well-designed 401(k) and profit-sharing plan, contribution limits cap out long before the tax pain does.
This is often the point at which conversations with our clients at Cedar Point Financial Services LLC turn to defined benefit plans. And for the right client, they can be transformative.
But among the most effective versions of these plans, and one that is little known and/or frequently misunderstood, is the Split-Funded Cash Balance Plan. When designed and administered properly, these plans allow business owners to make larger, tax-deductible contributions, while simultaneously addressing retirement income, asset protection, and life insurance planning in a single, coordinated strategy providing superior after-tax outcomes vis a vis other traditional qualified plans.
Importantly, for taxpayers who have filed an extension, it is not too late to establish and fund a Split-Funded Cash Balance Plan for the 2025 tax year. That timing nuance alone makes this an especially relevant discussion right now.
What Is a Split-Funded Cash Balance Plan?
At its core, a Split-Funded Cash Balance (SFCB) Plan is a tax-qualified retirement plan established by a business, whether a sole proprietor (including paid board members), partnership, or closely held company. Like all defined benefit plans, it is designed to provide a specified retirement benefit, with large deductible annual contributions determined by an actuary.
What differentiates a split-funded plan is how those required contributions are allocated. Instead of investing all plan assets in traditional investments such as equities and fixed incomes, the SFCB plan intentionally allocates a portion of its funding to permanent pension life insurance held inside the plan, with the balance invested in a diversified portfolio. The life insurance component is permitted under long-standing IRS rules, provided it satisfies the “incidental benefit” requirements, ensuring that retirement, not life insurance, remains the plan’s primary purpose.
In practice, many split-funded designs use a roughly 50/50 allocation: half of each contribution supports a well-funded cash value life insurance policy, and half supports traditional investments. This balance creates a unique blend of accumulation, protection, and tax efficiency.
Why Business Owners Find These Plans So Attractive
The planning specialists at Cedar Point Financial Services LLC and their actuarial partners find the appeal of a split-funded defined benefit plan begins with contribution size. Unlike defined contribution plans, which have relatively low capped annual contributions, defined benefit plans can allow six-figure contributions - often $100,000 to $400,000 or more per year - depending on age, income, and plan design. For business owners and paid board members in their 40s through late 60s with high earned income, this can dramatically accelerate retirement savings while producing significant current-year tax deductions.
But contribution size is only part of the story. These plans are also attractive because they allow the business owner to:
- use pre-tax dollars to fund both retirement benefits and life insurance
- accumulate assets in a structure that may offer strong creditor protection under federal law
- create flexibility at retirement through annuity or lump-sum distribution options
- integrate personal and/or estate-oriented life insurance planning into a tax-qualified framework
- create a source of tax-free retirement income
For owners who feel they are perpetually “behind” on retirement savings relative to income, split-funded plans offer a rare opportunity to catch up efficiently.
The Role of Pension Life Insurance Inside the Plan
Life insurance is not an add-on in a split-funded plan, it is a deliberate design feature.
Policies are initially purchased by, owned by, and payable to the qualified plan. Premiums are funded using tax-deductible plan contributions, and the policy’s cash value grows on a tax-deferred basis inside the plan. If a participant dies prior to retirement, the death benefit provides immediate liquidity to fund survivor benefits, often reducing the strain on plan assets and the business.
From a planning perspective, pension life insurance inside the plan serves four key purposes:
First, it provides risk management. Defined benefit plans promise retirement benefits over time. Life insurance ensures those benefits can still be paid if a participant dies prematurely.
Second, by including it in SFCB plans, it creates significantly larger tax-deductible contributions and current year tax savings than other qualified plan designs
Third, it creates a non-correlated asset inside the plan. While the investment portion of the plan is subject to market volatility, the pension life insurance component provides a more stable counterbalance.
Fourth, and this is where advanced planning from Cedar Point Financial Services LLC and its actuarial partners comes into play, the policy can ultimately be removed tax-free from the plan at retirement for its fair market value. At that point, it may be repositioned to support either estate and/or personal planning or tax-efficient retirement income planning outside the plan.
Why “Incidental Benefit” Rules Matter
The IRS allows pension life insurance inside qualified plans only if it remains incidental to the retirement benefit. This is not optional; it is actuarially determined and is closely monitored. At the onset, actuaries complete a feasibility study to determine the limited amount of pension life insurance that is permissible. This limit is designed to prevent qualified plans from being used primarily as life insurance funding vehicles with too good to be true tax treatment.
This is also why proper actuarial oversight and experienced third-party administration are essential. Ongoing monitoring ensures that insurance values, contributions, and benefit projections remain within permitted thresholds and that the plan retains its qualified status.
How the Strategy Unfolds Over Time
To illustrate how these plans work in practice, consider a high-earning professional in their early-to-mid 50s with income well in excess of $500,000 per year.
The plan is designed with a targeted retirement benefit, and required annual contributions are calculated by an actuary. During the early funding years, a portion of those contributions is directed toward a specially designed permanent pension life insurance policy, while the remainder is invested in a pension investment account.
After a defined funding period, typically over five years, the pension life insurance policy is fully funded then purchased away from the plan tax-free for its fair market value. At retirement, the participant may:
- roll the investment portion of the plan into an IRA
- elect an annuity or lump-sum distribution
- orient the pension life insurance toward estate and/or personal planning or for tax-free retirement income
It’s Not Too Late for 2025 (If You Filed an Extension)
At Cedar Point Financial Services LLC, we find that one of the most misunderstood aspects of defined benefit planning is timing.
For business owners who have filed a valid extension, a split-funded defined cash balance plan can still be established and funded for the 2025 tax year. Contributions made before the extended filing deadline can still be deductible for that year, provided the plan is properly adopted and implemented no later than September 15th of this year.
This creates a narrow but sufficient planning window, particularly for owners and paid board members who experienced a strong income year and are now looking for ways to reduce the resulting tax liability.
Potential Drawbacks and Who These Plans Are Not For
As compelling as split-funded cash balance plans can be, they are not universal solutions.
These plans work best for business owners who have:
- earned income of at least $400,000
- the ability to afford large contributions—at least $150,000 tax deductible
- a long-term planning horizon
These are not “plug-and-play” strategies and should never be implemented without specialized actuarial, TPA, tax, and life insurance expertise.
Why the Support of Cedar Point Financial Services LLC Matters in These Plans
Split-funded Cash Balance Plans sit at the intersection of retirement planning, tax strategy, and life insurance design. The pension life insurance component must be carefully selected and structured to function properly inside of a qualified plan.
This is about integrating pension life insurance as a financial tool within a broader retirement architecture, one that’s subject to actuarial testing and annual review.
When executed properly, pension life insurance enhances, rather than replaces the tax and retirement objectives.
We are Here to Help
Split-Funded Cash Balance Plans are not new, but they are enjoying renewed relevance as high-income business owners search for ways to regain control over taxation, retirement accumulation, and balance-sheet risk. They are sophisticated. They require commitment. And they demand coordination among advisors.
But for the right client, they represent one of the most compelling planning opportunities still available, especially for those who assumed their options had already run out. If you filed an extension, the window for 2025 is still open. The only real question is whether you are taking full advantage of it.
At Cedar Point Financial Services LLC, we work with clients’ legal, accounting, and other advisory professionals in developing and implementing strategies that optimize their individual and business financial plans.