I had a great time at La Fiesta Hispana and the Art Walk 2026!
In the last issue, we covered the small business 401(k), a standard employer-sponsored 401(k) plan, scaled for companies with employees beyond just the owner. This week, we will talk about the Defined Benefit Plan, a powerful retirement savings account for established businesses.
What Is a Defined Benefit Plan?
A defined benefit plan is a traditional pension: instead of defining how much goes in each year, it defines a target retirement benefit, and an actuary calculates how much must be contributed annually to fund it. Because the promised benefit can be substantial, especially for owners close to retirement age, the required contributions, and the resulting tax deduction, can far exceed anything available through a SEP IRA, SIMPLE IRA, or 401(k).
This is the most powerful plan in this series for sheltering income, and also the most complex and expensive to maintain. It’s generally reserved for established, consistently profitable businesses, often paired with a 401(k) in a combined plan design.
How It Works
- Actuarially determined contributions: An enrolled actuary calculates the annual contribution required to fund each participant’s promised benefit at retirement, based on age, compensation, and assumed investment returns.
- Contributions are generally mandatory: Unlike a SEP IRA, you can’t skip a year simply because cash flow is tight — the plan has a required minimum funding obligation.
- Benefit formula drives the numbers: Older, higher-income owners closer to retirement can generate the largest deductible contributions, since there are fewer years left to fund a given target benefit.
- Often combined with a 401(k): Many small businesses pair a defined benefit plan with a 401(k) profit-sharing plan to maximize total deductible contributions while still giving employees a familiar account-based benefit.
- PBGC insurance: Larger defined benefit plans may be subject to Pension Benefit Guaranty Corporation premiums and rules, though many small, owner-heavy plans qualify for an exemption.
2026 Contribution Considerations
| Item | 2026 Detail |
|---|---|
| Annual benefit limit (IRC §415(b)) | Adjusted annually by the IRS; determines the maximum pension benefit a plan can fund for a participant |
| Contribution amount | Not a fixed dollar limit — calculated by an enrolled actuary based on age, salary, and years to retirement |
| Typical annual contribution range for owners 50+ | Often $100,000–$300,000+, depending on age and compensation history |
| Required actuarial certification | Annual, performed by an enrolled actuary |
| Common pairing | Often layered with a 401(k) profit-sharing plan for a combined plan design |
Benefits and Drawbacks
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Who a Defined Benefit Plan Fits Best
Defined benefit plans tend to fit established business owners, often in their 50s or older, with stable, high income who are behind on retirement savings and want to shelter significantly more than a 401(k) or SEP IRA allows. They’re common among medical and dental practices, law firms, and other professional service businesses with few employees and strong, predictable cash flow.
They’re generally a poor fit for younger owners, businesses with unpredictable income, or businesses with a larger number of employees, since the mandatory funding requirement extends to eligible staff and the actuarial cost can be difficult to justify without consistent profitability.
(READING THIS SERIES: Each article that follows covers one plan in depth: how it works, exact 2026 contribution rules, a clear list of benefits and drawbacks, and the type of business it tends to fit best. Read the overview first, then jump to the plan, or plans, most relevant to your situation. That completes the seven-part series. Because contribution limits, testing rules, and plan design options change from year to year, confirm current-year figures and get a plan proposal from a retirement plan administrator, actuary, or CPA before adopting or funding any plan.)
If you have questions or would like to discuss any of these further, I would be glad to connect.
Thought for the Week:
“Every day may not be good, but there’s something good in every day”
– Alice Morse Earle
(This article is intended for general educational purposes only and reflects tax rules for the 2026 tax year. Tax laws are subject to change. The IRS sets contribution limits, deduction rules, and eligibility requirements annually, and they can change. This content does not constitute personalized investment, tax, accounting, financial, or legal advice. Please consult a qualified financial advisor, tax professional, ERISA attorney, or retirement plan provider before making retirement planning decisions for your business.)
Frederick Hogsett, Jr., is a licensed financial coach with almost 30 years of experience helping individuals, families, small businesses, and nonprofit organizations. His office is located in the Savannah, Georgia, area and can be reached at (803) 463-2773 or by website at www.livemore.net/fhogsettjrclient.