Cash Balance Plan vs Money Purchase Plan: Which Plan is Better for 401(h)?

A 401(h) account can't stand on its own. The statute permits retiree medical benefits only as a feature of a pension or annuity plan — which rules out profit-sharing plans and 401(k)s as hosts.

This leaves two realistic candidates for a small-business owner: a defined benefit plan (in practice, usually a cash balance plan) or a money purchase plan. Both are qualified pension plans. Both can lawfully carry a 401(h) account and they produce dramatically different results.

This article works the mechanics of each, puts real numbers on the gap, and then maps the fact patterns where each host wins.

§401(h) requires the medical account to ride on a pension plan — a plan providing definitely determinable benefits with a fixed employer funding obligation. A cash balance plan qualifies because it's a defined benefit plan.

A money purchase plan qualifies because, despite having individual accounts, it has a mandatory fixed contribution formula. This makes it a "pension" plan rather than a profit-sharing plan.

So which is better? The honest answer is it depends — and not in the hand-waving sense.

The two designs sit on opposite ends of a specific trade: the cash balance plan maximizes 401(h) funding capacity at the cost of actuarial complexity and expense, while the money purchase plan minimizes cost and complexity at the price of a much smaller medical account. Which one wins turns on measurable facts about the owner: age, income, how much medical funding they actually want, and what other plans they already run.

The choice of host matters because the host determines all three of the limits that cap the owner's 401(h) contribution:

A cash balance plan is a defined benefit plan, and that fact does two favorable things simultaneously.

First, the pension contribution is large. Cash balance contributions are actuarially determined and age-weighted; an owner in their 50s can routinely justify pension funding of $150,000–$300,000+ per year. That makes the subordination base big: a $200,000 pension contribution supports a 401(h) ceiling of roughly $66,667.

Second, the pension contribution stays out of the §415(c) bucket. DB accruals are tested under §415(b), not §415(c). With no other DC plan in the picture, the entire $72,000 annual-addition limit is available to absorb the 401(h) contribution alone.

Put together, a solo cash balance + 401(h) design can typically fund the medical account at the full subordination ceiling — often $60,000–$70,000 per year — with §415(c) slack.

The cost side. A cash balance plan requires an enrolled actuary, an annual actuarial valuation, Schedule SB certification, and minimum-funding compliance. Administration typically runs several thousand dollars a year more than a DC plan.

The sponsor also carries the interest-crediting obligation, which introduces modest funding volatility. None of this is exotic — it's the standard freight of any DB plan — but it's real, recurring overhead.

The money purchase plan's appeal is exactly what the cash balance plan lacks: no enrolled actuary, no Schedule SB, no actuarial valuation. Contributions are a fixed percentage of compensation stated in the document, administration is ordinary DC-plan administration, and annual cost is a fraction of a DB plan's. For an owner allergic to actuarial complexity, it's the lightweight path to a 401(h).

The problem is arithmetic, and it comes in two layers.

Layer one: the shared §415(c) bucket. Money purchase contributions are themselves annual additions. So unlike the cash balance design — where the pension money is tested under §415(b) and leaves the DC bucket empty — the MPP contribution and the 401(h) contribution compete for the same $72,000. Maximize the pair subject to both constraints (401(h) ≤ one-third of the pension contribution; combined ≤ $72,000) and the best you can do is:

• Money purchase contribution: $54,000
• 401(h) contribution: $18,000
• Combined: $72,000, with the 401(h) at exactly 25% of the total

Eighteen thousand dollars. That's the structural ceiling on a solo MPP-hosted 401(h) in 2026 — roughly a quarter of what the cash balance host supports.

Layer two: the 25%-of-compensation deduction limit. Since EGTRRA, money purchase plans are treated the same as profit-sharing plans for deduction purposes, which caps the employer deduction for defined contribution plans at 25% of participating compensation. An owner needs about $216,000 of W-2 compensation just to support the $54,000 MPP contribution in the illustration above. At $100,000 of W-2, the deductible MPP contribution tops out at $25,000 — and the subordination test then caps the 401(h) at roughly $8,333. The low-W-2 strategy that pairs so well with a cash balance host actively fights the money purchase host.

One further candor point: the deduction treatment of the 401(h) contribution itself on a money purchase host — whether it sits inside or outside the 25%-of-compensation base — is genuinely murkier than on a DB host, where the medical funding folds into the §404(a)(1) actuarial determination. MPP + 401(h) is a much rarer design than DB + 401(h), the authority is thinner, and anyone implementing it should get a specific opinion rather than relying on the DB-host conventions.

Solo owner, age 55, no other plans, 2026 limits:

"Which host is better for a 401(h)?" is really the question "what is the medical account for?" If the answer is maximum tax-advantaged retiree health funding — the $60,000+-per-year version of the strategy — the cash balance plan is the only host that gets there, and the actuarial overhead is simply the price of admission.

If the answer is a modest, cheap, predictable medical benefit bolted onto a simple pension structure, the money purchase plan delivers it at a fraction of the cost — as long as the owner's W-2 supports the deduction math and everyone involved is comfortable with the thinner authority behind the design. The mistake is choosing the host before deciding which of those two strategies you're actually running.