CLIENT KNOWLEDGE BASE

    The Defined Benefit Plan

    Defined Benefit Plans: How They Work, When They Shine, And Where They Don’t

    Introduction to the DBP

    At Anomaly, we are often asked for advice on how to supercharge retirement plans.

    A defined benefit (DB) plan promises participants a specific retirement benefit, usually an annual pension, rather than an account balance.

    The employer’s tax deduction equals the amount an enrolled actuary certifies is needed to fund that promise, subject to the deduction limits in Internal Revenue Code § 404 and the benefit ceiling in § 415 (the 2025 limit is $280,000 per participant at age 62). 

    Because contributions are actuarially driven, older or highly compensated owners can often shelter well into six figures per year, far beyond the combined limits of a 401(k) and profit-sharing plan.


    1. 1

      Core Features And Tax Mechanics of the DBP

      • Tax Timing - Employer deducts contributions when paid; employees recognize income only when benefits are distributed.

      • Actuarial Flexibility - Each year an enrolled actuary sets both a minimum-required and a maximum-deductible contribution based on age, compensation, investment performance, and funded status.

      • Mandatory Funding (a possible downside) - The annual minimum contribution must be deposited on time; missed payments trigger excise tax and interest.

      • Combined Plans (supercharged) - A DB plan can coexist with a 401(k) or profit-sharing plan. For most sponsors the combined employer deduction limit is 25 percent of covered payroll plus employee deferrals.
    2. 2

      Entity-Specific Considerations

      • C Corporation The corporation deducts the contribution and the owner-employee receives the benefit tax-deferred; ownership percentage is irrelevant.

      • S Corporation The S-corp deducts the contribution, which flows through on Schedule K-1 and reduces the shareholders’ adjusted gross income. 
        • Benefits are not limited by § 199A wage thresholds.

      • Partnership Or Multi-Member LLC The deductible contribution reduces ordinary business income; each partner receives a basis increase. 
        • Partners paid as guaranteed-payment employees may still participate.

      • Sole Proprietor Or Single-Member LLC The owner deducts contributions on Schedule C. A solo DB paired with a 401(k) can allow a high-earning owner in her 50s to contribute well above $200,000 per year.
    3. 3

      When A Defined Benefit Plan Makes Sense in our Opinion

      1. Owner Aged 50-62 With Consistent Compensation Above $250,000
        1. Actuarial formulas permit annual contributions that can exceed $250,000, dwarfing defined-contribution caps.

      2. Closely Held C-Corp With A Small Staff
        1. Corporate deduction is valuable; PBGC exemption often applies to professional service firms with 25 or fewer participants.

      3. Short Retirement Runway
        1. A five- to ten-year funding horizon lets owners “catch up” quickly on retirement savings.

      4. Exit Planning During Peak-Income Years
        1. Front-loading contributions lowers taxable income ahead of a business sale and may temper golden-parachute exposure.
    4. 4

      When A Defined Benefit Plan Falls Short in our Opinion

      • Volatile Or Low Profits 
        • Required minimum funding can strain cash flow during lean years.

      • Many Older Rank-And-File Employees 
        • Benefits promised to staff may outpace the owners’ tax savings.

      • Early-Stage Or Cyclical Businesses 
        • Uncertain earnings make fixed obligations riskier than a discretionary 401(k) match.

      • Owners Under Forty With Modest Pay 
        • Contribution room is often no higher than the 25 percent profit-sharing limit.
    5. 5

      Sample Funding Illustrations (2025 Assumptions)

      • Doctor, Age 60, W-2 Income $350,000 
        • Solo practitioner targets age 65 retirement with a benefit equal to 100 percent of average pay. First-year deductible contribution range: approximately $205,000 to $290,000.

      • Marketing Digital-Agency Owner, Age 46, S-Corp Salary $200,000, Two Employees In Their 20s 
        • Cash-balance design credits 5 percent of pay plus 5 percent interest. 
        • Owner contribution: roughly $115,000; total staff cost: about $12,000.
    6. 6

      Administration And Ongoing Obligations (Headaches)

      1. Plan Design 
        1. Choose a traditional annuity or cash-balance formula, set retirement age, benefit cap, and vesting schedule.

      2. Meet Funding Deadlines Deposit at least the minimum contribution within 8½ months after the plan year ends; deposit up to the maximum by the corporate return due date, including extensions.
    7. 7

      Putting it all together

      A defined benefit plan is a powerful, age-weighted tax shelter that can accelerate retirement savings for high-income owners well beyond 401(k) limits. 

      It excels when cash flow is predictable, staff numbers are small, and owners are nearing retirement. 

      It falters in volatile earnings environments, employee-heavy firms, and for younger owners with modest compensation (under $200 to $300k). 
      These plans are relatively complex but we work with many great plan designers who can support, including any calculations and estimates.  Contact your Anomaly PM for more!

    If you still have a question, we’re here to help. Contact us