In today’s tax environment, where combined federal and state income tax rates can exceed 50%, professional service firms frequently seek ways to mitigate tax exposure for their partners. With our actuarial and benefits expertise, Milliman’s employee benefits consulting practice was able to help a law firm develop a retirement plan that allowed its partners to defer a significant amount of taxable income until retirement.

The challenge: How can a law firm offer flexible retirement benefits for high-income earners?

The challenge facing the law firm’s partners was twofold:

1. Limited tax deferral opportunities: Organizations generally offer retirement savings plans (e.g., a 401(k) plan). However, these vehicles are subject to annual IRS limits that restrict high-income earners, allowing them to defer only a small fraction of compensation. High-income earners often need additional retirement strategies to maintain their standard of living.
2. A need for flexibility: The needs of each partner were not uniform. Older partners with a stable book of business preferred the ability to defer the maximum amount of contributions allowed under the law to mitigate taxes, while younger partners or partners with families wanted the ability to defer less and receive a greater share of income for their immediate needs.

The solution: Milliman designed a cash balance plan offering flexibility and tax-deferral opportunities

Milliman was chosen as the actuarial and administrative vendor to develop a cash balance pension plan. Cash balance plans are pension plans that have the look and feel of a 401(k), and similar to a 401(k), each participant receives an annual pay credit (i.e., a percentage of earnings or a fixed dollar amount) and an annual interest credit. The interest crediting rate can be a fixed rate (e.g., 5% each year) or a variable rate (e.g., equal to the return on plan assets). Although similar to a 401(k), the maximum amount of taxable income that can be deferred under a cash balance plan is much higher.

Milliman designed a cash balance plan with the following features:

• Significant tax deferral opportunities: Depending on the age of the individual, participants can defer more than $250,000 annually in addition to their 401(k) contributions.
• Flexibility: The plan offers a menu of pay credit schedules. When a partner enters the plan, they choose the pay credit schedule that best fits their needs. The plan offers schedules that increase with age, as well as schedules that remain fixed.

The outcome: The new cash balance benefit helped the law firm’s partners save for retirement

Thanks to Milliman, the law firm successfully obtained the following outcomes:

• Deferred taxes: Partners are able to defer a significant amount of taxable income in alignment with their individual situation.
• Significant retirement savings: Given the plan’s fixed interest crediting rate, cash balance accounts can often exceed $3.5 million at retirement (depending on the pay schedule selected). The ability to defer and accumulate substantial amounts in this plan provides the savings beyond 401(k) plans that high-income earners often need.

By combining deep actuarial expertise with thoughtful plan design, Milliman helped create a retirement strategy that balances meaningful tax deferral with the flexibility partners need at different stages of their careers. For professional service firms seeking more effective ways to manage tax exposure and strengthen long-term retirement outcomes, a well-designed cash balance plan can be a powerful addition to their benefits strategy.