Retirement Plans
Plan Types
Defined Benefit (DB) Plans
» DB Plan Executive Summary
Unlike defined contribution plans (such as 401(k) plans and profit sharing plans) that do not typically provide a guaranteed level of benefit for the employees, DB plans rely on the employer to make required contributions on their employees’ behalf to provide a pre-determined benefit at retirement.
While DB plans have received some negative press in the past, they still offer great opportunities to small business owners to realize large, tax-deductible contributions. With higher allowable annual contributions available, DB plans are undoubtedly the best way to maximize retirement savings for individuals with a shorter horizon to retirement.
Characteristics of a DB plan
The number one attraction to a DB plan is that tax-deductible contributions for a participant can be higher than the $50,000/$55,500 limit of a defined contribution plan.
Each year’s contribution is based on the amount necessary to pay the participant up to 100% of income as an annual retirement benefit. That means, under a DB plan, a participant may be able to replace 100% of their monthly income upon retirement. The primary factors that determine the participant’s contribution are:
When should you consider a DB plan?
Typical candidates for this type of plan are usually businesses with stable income and profits, where the owners or the key employees are older than the rest of the staff. DB plans also work for businesses such as:
What are the pitfalls to avoid?
Larger deductions come with their own set of limitations. Some points to consider before recommending a DB plan:
- The contributions to the plan are required each year. Will my business have the income to support the required contribution each year?
- Will my deduction goals change year after year?
- How much flexibility do I want with my annual contribution?
To find out more about this type of plan, or to determine whether your clients would benefit from sponsoring a DB plan, contact one of our Pension Consultants.