Defined benefit plans
have enjoyed a resurgence in recent years,
particularly in the small business marketplace.
As we approach the end of the year, many
small business owners may want to consider
implementing defined benefit plans as a
method for accumulating substantial tax-deferred
retirement savings quickly.
Following is a short overview of defined
benefit plans, along with a table illustrating
maximum deductible contributions:
Defined Benefit Plan Overview
Employers who do not require absolute
discretion when determining the amount of
their annual retirement plan contribution
often establish defined benefit plans. Typically,
this is an employer whose annual profit
picture does not fluctuate and can commit
to an annual required contribution.
Defined benefit plans pay a fixed benefit
upon retirement. The benefit is based on
the formula outlined in the plan document.
The contributions are actuarially determined
on the anticipated benefit at retirement.
The factors that determine the total contribution
are: Participants’ compensation and
age, trust account earnings, and years of
The plan sponsor bears investment risk
because plan benefits don’t depend
on contributions or investment results.
If the assets fail to earn the rate of return
used as the actuarial assumption, a greater
contribution may be required the following
year. Or, conversely, if the investments
outperform expectations, the plan will have
an actuarial gain, which may reduce future
Advantages of Defined Benefit
- In many cases, allows for a greater
tax-deductible contribution than other
- Provides higher benefits to older
owners and/or key employees
- Provides a more significant benefit
to older employees who are approaching
- Rewards employees who remain employed
for many years.
Additional information pertinent to Defined
- The annual compensation limit is
$245,000 for plan years beginning in 2009.
- Participants are able to calculate
what their future retirement benefit will
be, though the mathematics can be complex.
- The annual benefit that may be paid
to a participant is generally limited
to the lesser of $195,000 in 2009 or 100%
of the participant’s average compensation
for the highest three consecutive years.
- The Internal Revenue Code requires
that the employer meet annual minimum
- Depending upon the nature of the
business sponsoring the plan, insurance
premiums payable to the Pension Benefit
Guaranty Corporation (PBGC) may be required.
The table below compares the estimated maximum
contributions available through defined
benefit plans and 401(k) / profit sharing
plans at various ages.
/ Profit Sharing Plan*