Defined Benefit Plans

Defined benefit plans are pension plans that allow the maximum tax deductible retirement contributions permitted by IRS rules. Contributions to a defined benefit plan are dependent on an individual’s age and income, but can potentially be $100,000 to $200,000 or more annually.

Defined benefit pension plans can be established by a self employed business owner or by a company that has W-2 employees. Defined benefit plans can be simplified by separating these two groups.

Self employed, an owner and spouse business, business with multiple owners with no W-2 employees

Many independent contractors, entrepreneurs and small business owners are self employed and have no W-2 employees or have a spouse as their only W-2 employee. Self employed business owners with high income and the goal to maximize their tax deductible retirement contributions frequently create their own defined benefit pension plan. Sole proprietorships, LLCs, partnerships, C corporations and S corporations are potentially eligible. Self employed business owners are fortunate because they receive 100% of the contribution and generally the contribution is 100% tax deductible as a business expense. In order to maximize annual contributions a defined benefit plan will often be combined with a 401k profit sharing plan.

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Small business owners and corporations with W-2 employees

The design of a defined benefit plan is more complicated when a business consists of a business owner or multiple partners/owners and employs W-2 employees who work more than 1,000 hours in a calendar year. Frequently the goal of our clients is to have a defined benefit plan designed to maximize contributions to the business owner(s) and to key employees while minimizing contributions to rank and file employees and still satisfy IRS rules. To achieve this goal often times the actuary will design the traditional defined benefit plan to be combined with a 401k profit sharing plan. On other occasions it may be more beneficial to setup a type of defined benefit plan called a cash balance plan. With cash balance plans employees are divided into groups or tiers by their position with each group receiving a different level of contribution. The tiered benefit levels of a cash balance plan can be attractive for partnerships and professional groups with varying levels of ownership and compensation among owners such as law firms and medical practices.

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Beacon Capital Management Advisors provides defined benefit plans to the self employed, entrepreneurs, independent contractors and small business owners. Contact us if you have questions and need advice or if you would like to receive a defined benefit plan proposal.