Adding a cash balance plan alongside the existing profit sharing arrangement inside the practice, a PLLC taxed as an S-corp. Two plan years are open. The 2025 year can still be claimed retroactively, and that window closes September 15.
| Input | 2025 | 2026 | Basis |
|---|---|---|---|
| 402(g) elective deferral | $23,500 | $24,500 | IRS limits. No catch-up; Nathan is 40, turning 41 in December. No retroactive deferral for 2025. |
| 415(c) annual addition | $70,000 | $72,000 | Per unrelated employer. |
| 401(a)(17) compensation cap | $350,000 | $360,000 | W-2 is below the cap in both years. |
| 415(b) annual benefit, unphased | $280,000 | $290,000 | Payable at age 62. |
| 415(b) accrued benefit, phased | $28,000 | $58,000 | One tenth per year of participation. This is the binding constraint in both years, not the 100% of high-three average compensation test. |
| Cash balance credit | $117,700 | $132,400 | Present value of each year's incremental accrual: annuity factor 12.3 at age 62, discounted at 5% over 22 and 21 years. Illustrative pending actuarial certification of the factor, the discount basis and Nathan's years of service. |
| Employer profit sharing | already funded | $15,000 | 6% of compensation under the 404(a)(7)(C)(iii) safe harbor. The 2025 figure must test at or below $14,890; see finding 3. |
| W-2 compensation | $248,167 | $250,000 | Actual 2025 wages; 2026 modeled flat. |
| Combined marginal rate | 39.75% | 39.50% | 35% federal in both years, plus state rates of 4.75% and 4.50%; the state cut its top rate effective tax year 2026. Taxable income stays inside the 35% bracket before and after the deduction in both years. |
| SALT deduction | $10,000 floor | $10,000 floor | Caps of $40,000 and $40,400, phasing down 30 cents per dollar of MAGI above $500,000 and $505,000 and reaching the floor at $600,000 and $606,333. Both years clear the floor point, 2025 by roughly $300. See finding 4. |
| Social Security wage base | $176,100 | $184,500 | Wage increases above this bear Medicare only, at a combined 3.8%. |
| QBI deduction | $0 | $0 | SSTB above the phaseout, with a $74,432 loss carryforward into 2026. Contributions carry no QBI side effect. |
| Current employer funding | $35,304 | $35,304 | $2,942 per month doctor-draw contribution. Split between deferral and employer money to be tied to the payroll register; see finding 3. |
Each year's maximum credit is the present value of that year's incremental accrual: one tenth of the 415(b) dollar limit, converted at a 12.3 annuity factor and discounted at 5% to current age. The phase-in runs on years of participation, so every year the plan does not exist is a tenth of the terminal benefit permanently forgone. That is what makes the 2025 window worth chasing rather than starting clean in 2026. Compensation does not enter until the cumulative accrued benefit approaches 100% of the high-three average, which at a $250,000 wage happens in 2033.
High-three average compensation is a three-year average, so the wage has to sit at $290,000 across 2031 through 2033 to clear the wall. The model holds the dollar limit flat rather than indexing it; indexing pulls the wall forward by roughly a year, which is why the step-up should be executed by 2030.
Both paths assume ten or more years of service with the PLLC, so the 415(b) compensation limit is fully phased in. A shorter service history phases that limit in as well and compresses both curves.
The phase-in runs on years of participation, and at 40 Nathan has the longest discount period he will ever have. That combination is what turns a $28,000 annual benefit into $117,700 of deductible funding for 2025. A year not claimed cannot be recovered at any wage or in any later year. This is the decision with a deadline.
Moving the W-2 now costs $572 a year in net payroll tax and buys nothing until 2033. Raise it if there is an independent reasonable-compensation reason; otherwise revisit in 2030, with five more years of practice income and a settled answer on the buy-in and the staffing structure.
A cash balance plan executed and funded by September 15, 2026 can be treated as effective December 31, 2025. That is $117,700 of deduction at a 39.75% combined rate, worth $46,786, against a year that is otherwise closed. It also moves the entire ramp forward twelve months, which is worth more than the deduction itself: the tenth of the terminal benefit earned in 2025 is unrecoverable if the window passes.
Practically this requires four things in sequence: actuarial certification of the 2025 credit, an executed plan document and adoption resolution, a funded trust account at the custodian, and the 2025 Form 1120-S claiming the deduction. All four by September 15. The account has to exist before the wire, which puts the custodial paperwork in August.
Under 404(a)(7)(C)(iii) the DC plan is disregarded for the combined deduction limit when employer DC contributions stay at or below 6% of compensation. Above 6% the combined limit applies, and it is the greater of 25% of compensation or the DB minimum required contribution. At a $250,000 wage, 25% is $62,500, well below the cash balance contribution alone, so staying inside the 6% safe harbor is the only sensible structure. Elective deferrals are excluded from the test under 404(n), so the $24,500 survives intact.
Employer contributions above the deductible limit also draw the 4972 10% excise for every year they remain in the plan. The PBGC offset is genuinely unavailable here: the exemption for professional service employers with 25 or fewer participants applies to a solo physician PLLC, and coverage cannot be elected into.
The 6% safe harbor for 2025 is $14,890. The $35,304 contributed for the year is well above that. If the whole amount is employer money, a retroactive 2025 DB adoption throws $20,414 outside the deductible limit, with the 4972 excise attached. If the split is $23,500 of elective deferral and $11,804 of employer contribution, 2025 is clean and the full $117,700 is deductible on top. The amount cannot all be deferral, since $35,304 exceeds the 2025 402(g) limit, so the answer is somewhere in between and it decides whether the 2025 window is worth opening.
Related and equally overdue: the file shows Nathan maxing a hospital-system 401(k) with the deduction run through the S-corp. Deferrals into an unrelated employer's plan cannot be funded or deducted through the PLLC's payroll, and 402(g) is a personal limit, so he cannot defer at both. The 2026 model assumes the deferral moves to the PLLC plan; if it stays at the hospital plan, drop $24,500 from every 2026 scenario.
The cap reaches its $10,000 floor at $600,000 of MAGI for 2025 and $606,333 for 2026. A $117,700 deduction puts 2025 MAGI at roughly $600,300, about $300 clear. The 2026 increment leaves roughly $6,200 of clearance. So the flat 39.75% and 39.50% rates hold, barely.
Below those points every dollar of deduction restores 30 cents of SALT cap, which makes the effective federal marginal rate 45.5% and the combined rate close to 50%. That has a direct instruction attached: ask the actuary to certify the maximum deductible 2025 contribution under 404(o), including the funding cushion, not just the minimum. The cushion could support something closer to $176,000, and the dollars above $118,000 would come in at roughly 50% rather than 39.75%.
401(a)(26) requires a DB plan to cover the lesser of 50 employees or the greater of 40% of employees and two employees, so a second participant would have to accrue a meaningful benefit. But under Reg. 1.401(a)(26)-6, employees who have not satisfied the plan's minimum age and service conditions are excludable from the test, and a 21-and-one-year-of-service condition keeps a recent hire out of the count for a full plan year.
So a 2025 and 2026 adoption can still be clean even if Megan Hale is a PLLC employee, provided her service date is recent enough, with the 7.5% combined-plan gateway and top-heavy minimums arriving later and with an actuary already engaged. Settle the service date and the eligibility design together.
The 0.208% effective interest is nowhere near the 80% controlled group threshold. The 414(m) A-organization test has no minimum ownership percentage, but it requires the A-organization to be a partner or shareholder in the first service organization, so how the interest is titled matters: personally held units reach the PLLC only through the 318 attribution rules. Whether an ASC platform is a service organization at all is a separate question where capital is a material income-producing factor.
The same issue runs through the affiliated physician group under the 414(n) leased employee rules if clinical or administrative staff sit on their payroll but work under Nathan's primary direction. A coverage failure discovered after the trust is funded is far more expensive than the opinion.
The 2025 contribution cuts federal tax by about $41,200 and state tax by about $5,590. Against the $48,520 federal balance already paid with the extension, that turns most of the payment into an overpayment. Elect to apply it forward on the 2025 return rather than requesting a refund.
For 2026, roughly $112,100 of incremental deduction cuts federal tax by about $39,200 and state tax by about $5,040, so the $16,250 quarterly federal estimates should come down for Q3 on September 15 and Q4 on January 15, subject to safe harbor. The applied 2025 overpayment covers most of what remains. Net new cash needed by September 15 is the $117,700 trust deposit, against the $304,790 buy-in if that proceeds.
With SALT pinned near the floor, none of the state tax on the K-1 is currently deductible. A pass-through entity tax election moves it to an entity-level deduction worth roughly $3,000 to $3,500 a year against post-plan K-1 income.
On timing: the state's stand-alone election windows, during the preceding tax year or within two months and 15 days of the year's start, have closed for both 2025 and 2026. But the election can also be made on the entity return itself, up to the extended due date, so both years are still available that way. Election mechanics vary by state; confirm yours. Note the two levers partly substitute for each other: the plan contributions shrink the K-1 the PTET would otherwise capture.
A cash balance plan carries a minimum funding requirement. Practice income has moved from roughly $304,000 of AGI in 2023 to $515,000 in 2024 to $718,000 in 2025, and the buy-in may add debt service of about $2,318 per month. Size the pay credit to what the practice clears in a soft year, not the trailing twelve months. A stated credit near $125,000 against roughly $649,000 of T12 net income is defensible; a formula with a range, or grouping language allowing a lower credit, buys flexibility without an amendment.
Use an actual-rate-of-return crediting rate rather than a fixed 4% or 5% to keep the trust from drifting into over- or underfunding. Invest the trust conservatively, targeting the crediting rate. That is also the right place for the household's fixed income: bonds inside the cash balance trust, equities in the taxable brokerage account and in the 401(k) and Roth sleeves.
| Vehicle | Owner | Amount | Note |
|---|---|---|---|
| 401(k) elective deferral, pre-tax | Nathan | $24,500 | Assumes the deferral moves to the PLLC plan, not the hospital's. |
| Profit sharing | Nathan | $15,000 | 6% of $250,000, per the 404(a)(7)(C)(iii) safe harbor. |
| Cash balance pay credit | Nathan | $132,400 | Second plan year. Falls to $128,000 if the 2025 window is not claimed. |
| 401(k) elective deferral, pre-tax | Erin | $24,500 | Currently deferring 10%, which is $22,500 on base pay. Raise to 10.9% or add a bonus deferral election. |
| Employer 401(k) match | Erin | $13,500 | 100% of first 6% of eligible compensation. |
| After-tax with in-plan Roth conversion | Erin | $34,000 | Fills her $72,000 415(c) limit. The mega-backdoor is the household's only meaningful Roth lever. |
| Total tax-advantaged savings | $243,900 | About 34% of 2025 total income. |
415(c) is a per-participant limit, so Nathan's and Erin's annual additions are independent of one another regardless of where they work. The unrelated-employer point matters for Nathan alone: it is what would give him a separate 415(c) limit at the hospital and at the PLLC. Only 402(g) is a personal limit, and it applies to each of them separately.