Examples of Defined Benefit Plans
Defined Benefit Plan Examples & Cash Balance Plan Examples for Small Businesses
For small business owners, Defined Benefit Plans are one of the most powerful ways to save for retirement. Unlike 401(k) Plans, SEPs, or SIMPLEs, Defined Benefit Plans allow much larger tax-deductible contributions and a more rapid accumulation of retirement wealth.
In small businesses, the owner is both the employer and the employee, so the plan is primarily designed to fund the owner’s retirement. Employees must be covered to meet nondiscrimination requirements, but benefits for staff are often minimal compared to the owner’s allocation.
Unlike large corporate pensions, these plans function as accumulation vehicles: contributions grow tax-deferred, and the balance is usually rolled into an IRA or other qualified plan at termination, rather than paid as a monthly pension.
Cash Balance Plans are a type of Defined Benefit Plan that express the retirement benefit as an account balance, making it easier to allocate contributions among multiple owners or employees.
Turbo Charge Your Retirement Savings
Background: Tom and Barbara are in their 60s and own a successful real estate company. This year, a strong economy has resulted in substantial profitability. In addition, with the day-to-day management of their business, saving for retirement has not been a priority in the past. They are exploring alternatives to quickly save for retirement while being tax-efficient. Moreover, they are uncertain whether strong growth in their industry will continue, so they want to "front-load" their contributions.
Solution: In this example, a Traditional Defined Benefit Plan paired with a 401(k) Profit Sharing Plan allows Tom and Barbara to make a tax-deductible contribution of nearly $1,000,000 in their first year. Upon retirement, Tom and Barbara will rollover their Defined Benefits to an IRA to continue tax deferral. Click here to see more detail.
Why it works:
Solution: In this example, a Traditional Defined Benefit Plan paired with a 401(k) Profit Sharing Plan allows Tom and Barbara to make a tax-deductible contribution of nearly $1,000,000 in their first year. Upon retirement, Tom and Barbara will rollover their Defined Benefits to an IRA to continue tax deferral. Click here to see more detail.
Why it works:
- Enables large, "catch-up" contributions for the owners.
- Maximizes tax deductions in a very profitable year.
- Highlights the front-loading advantage of Traditional Defined Benefit Plans for single-owner businesses
Example 1: Short Horizon, Massive Deduction
Example 2: Young Owner, Large Tax Savings
Example 3: Medical Group with Multiple Owners
Background: Jessica is a business owner in her late 30s who provides educational products to parents. She has two employees to assist her. Her business has experienced steady growth over the last several years, and she wants to manage her tax liability and make retirement contributions in excess of other retirement limits. In addition, she would like to provide meaningful benefits to her employees, while allocating the lion's share of benefits towards herself, as the owner.
Solution: A Traditional Defined Benefit Plan in combination with a 401(k) Profit Sharing Plan allows Jessica to contribute and deduct over $140,000 and allocate about 96% of contributions towards herself as the owner. When the plan is terminated, Jessica's benefit will be payable as a lump sum distribution and rolled over to an IRA. Click here to see more detail.
Why it works:
Solution: A Traditional Defined Benefit Plan in combination with a 401(k) Profit Sharing Plan allows Jessica to contribute and deduct over $140,000 and allocate about 96% of contributions towards herself as the owner. When the plan is terminated, Jessica's benefit will be payable as a lump sum distribution and rolled over to an IRA. Click here to see more detail.
Why it works:
- Provides a highly leveraged retirement strategy for young owners.
- Balances employee coverage with owner-focused accumulation.
- Reduces taxable income while maximizing retirement savings.
- Uses Traditional Defined Benefit Plan front-loading to accelerate contributions.
Background: An established medical practice is owned by several physicians, all with distinct retirement horizons. The physicians have significant incomes and need a way to shelter a portion of their earnings from high taxes, while funding towards the maximum Defined Benefit value of $3.6 million per owner. Because each physician has a different length of time to retirement, they need a way to customize the allocation to each owner. Additionally, the owners only want to provide a minimal benefit to their employees, while complying with applicable regulations.
Solution: In this Defined Benefit Plan example, a Cash Balance Plan along with a 401(k) Profit Sharing Plan most easily allows for targeted allocations to each owner. In addition, since the retirement benefit is expressed as an account balance, it is easier for owners to understand. Under this arrangement, a deductible contribution of over $670,000 is possible with about 94% of the contribution allocated to the physician owners. Click here to see more detail.
Why it works:
Solution: In this Defined Benefit Plan example, a Cash Balance Plan along with a 401(k) Profit Sharing Plan most easily allows for targeted allocations to each owner. In addition, since the retirement benefit is expressed as an account balance, it is easier for owners to understand. Under this arrangement, a deductible contribution of over $670,000 is possible with about 94% of the contribution allocated to the physician owners. Click here to see more detail.
Why it works:
- Cash Balance Plan design enables custom owner allocations.
- Transparent account balances make retirement accumulation easy to understand.
- Combines tax-efficient contributions with flexibility for multiple owners.
Example 4: Four Partners, Only One Maximizing
Background: A partnership of four middle-aged owners provides consulting services to educational institutions. They have experienced strong growth but have not had to hire any employees. Of the four owners, only one partner wants to maximize his retirement contribution. A second partner wants to save a moderate amount, and the remaining owners are not interested in contributing towards retirement.
Solution: In this example, a Cash Balance Defined Benefit Plan is a good vehicle for allowing and tracking different contribution amounts to each owner. As mentioned previously, Cash Balance Plans are easier for business owners to understand. A combo 401(k) Profit Sharing Plan is added to further increase the maximum deductible contribution of the interested owner. In this situation, over $300,000 may be deductible, with about 95% of that amount attributable to the interested owner. Click here to see more detail.
Why it works:
Solution: In this example, a Cash Balance Defined Benefit Plan is a good vehicle for allowing and tracking different contribution amounts to each owner. As mentioned previously, Cash Balance Plans are easier for business owners to understand. A combo 401(k) Profit Sharing Plan is added to further increase the maximum deductible contribution of the interested owner. In this situation, over $300,000 may be deductible, with about 95% of that amount attributable to the interested owner. Click here to see more detail.
Why it works:
- Supports unequal contribution levels under one plan.
- Gives high contributors a tax-efficient way to save.
- Easy for owners and employees to track allocated benefit.
How Defined Benefit and Cash Balance Plans Work for Small Businesses
Defined Benefit Plans for Owner-Only Plans
- Ideal for one-owner or owner/spouse businesses with no employees, since contributions can focus entirely on the owner(s).
- Generally allows for larger upfront contributions (front-loading), which is beneficial for matching contribution deductions to highly profitable years or to accelerate wealth accumulation.
- Used as an accumulation vehicle, rather than as a monthly pension.
- Contributions are tax-deductible and grow tax-deferred.
- If employees are present, coverage is required, but in single-owner businesses, all contribuitons benefit the owner.
- At plan termination, the balance is typically rolled over to an IRA or other qualified plan.
Cash Balance Plans for Businesses with Multiple Owners or Employees
- A type of Defined Benefit Plan using an account balance benefit, showing each participant’s lump sum value.
- Benefits grow via pay credits (fixed dollar or percentage of compensation) and interest credits (fixed or variable).
- Easier to communicate when there are multiple owners or employees, and contributions can be customized per owner and/or participant.
Contribution Potential & IRS Limits
- Owners in their 50s–60s can contribute up to $200,000–$400,000+ per year, depending on age and compensation.
- Combining a Defined Benefit Plan with a 401(k) Profit Sharing Plan can increase contributions further.
- IRS maximum lifetime retirement benefit in 2025 is approximately $3.6 million per participant. Calculate your maximum lifetime benefit.
Case Studies: Defined Benefit & Cash Balance Plan Examples
Pros and Cons of Small Business Defined Benefit Plans and Cash Balance Plans
Advantages:
- Allows much larger contributions than 401(k) Plans or SEP-IRAs.
- Maximizes tax-deductible accumulation for the owner.
- Flexible designs if there are multiple owners or employees.
- Transparent growth in cash balance plans.
- Traditional Defined Benefit Plans allow front-loading of contributions.
Drawbacks:
- Annual funding commitment required.
- Higher administration and actuarial costs than other plans.
- Less flexible than other plans.
Who Can Benefit from Defined Benefit Plans & Cash Balance Plans
- Small business owners looking to catch up on retirement savings.
- High-income earners aiming for large tax deductions.
- One-owner or owner/spouse businesses seeking maximum front-loaded contributions.
- Multi-owner professional firms (medical, law, consulting) needing customized allocations.
- Owners who want a tax-efficient accumulation vehicle while providing minimal employee coverage.
Key Takeaways
These Defined Benefit Plan and Cash Balance Plan examples show how small business owners can rapidly accumulate retirement wealth while maximizing tax efficiency and minimzing the cost of employee benefits.
The Defined Benefit or Cash Balance Plan can be paired with a 401(k) for even higher contributions, and all benefits are typically rolled over to an IRA at plan termination, making it a flexible, owner-focused retirement vehicle. Traditional Defined Benefit Plan are particularly efficient for owner-only businesses because of the front-loading advantage.
The Defined Benefit or Cash Balance Plan can be paired with a 401(k) for even higher contributions, and all benefits are typically rolled over to an IRA at plan termination, making it a flexible, owner-focused retirement vehicle. Traditional Defined Benefit Plan are particularly efficient for owner-only businesses because of the front-loading advantage.
Frequently Asked Questions (FAQs)
1. What is a Defined Benefit Plan for a small business?
A Defined Benefit Plan for a small business is a retirement plan primarily designed to accumulate wealth for the owner. Unlike corporate pensions, it generally is not used to provide a guaranteed monthly income to employees but allows large, tax-deductible contributions that grow tax-deferred, and the balance can be rolled over to an IRA . Employees must be covered, though their benefits are often minimal compared to the owner.
2. How does a Cash Balance Plan differ from a Traditional Defined Benefit Plan?
A Cash Balance Plan is a type of Defined Benefit Plan that expresses benefits as an account balance rather than a monthly pension. This makes it easier to understand and allocate contributions among multiple owners or employees while still providing tax-advantaged accumulation for the owner.
3. Can small business owners maximize their retirement savings with these plans?
Yes. Small business owners, especially those over 50, can make substantially larger contributions than with a 401(k) Plan or SEP-IRA. When combined with a 401(k) Profit Sharing Plan, annual tax-deductible contributions can exceed $300,000–$400,000, depending on age, compensation, and plan design.
4. Do employees need to be covered in a small business Defined Benefit Plan?
In general, yes, eligible employees must be covered to comply with IRS and ERISA rules. However, plan design allows most of the contributions to favor the owner, while still meeting minimum coverage requirements.
5. What happens to the plan balance at termination?
In small business Defined Benefit and Cash Balance Plans, the accumulated balance is typically rolled over to an IRA or other qualified retirement account. This allows the owner to continue tax-deferred growth rather than electing a corporate-style monthly pension.
6. Are these plans suitable for multi-owner businesses?
Absolutely. Cash Balance Plans are especially useful for firms with multiple non-spouse owners or partners. Contributions can be customized for each owner, allowing one partner to maximize retirement savings while others contribute less, all within a single compliant plan.
7. What are the main benefits for small business owners?
- Large tax-deductible contributions.
- Accelerated retirement savings for the owner.
- Minimal employee allocation relative to owner benefits.
- Potential to combine with 401(k) Profit Sharing Plans for even higher contributions.
8. Which type of Defined Benefit Plan is best for a one-owner or owner/spouse business?
For small businesses with only the owner or the owner and spouse, a Traditional Defined Benefit Plan is often the most flexible. These plans can allow larger front-loaded contributions, making it easier for owners to quickly fund their retirement and maximize tax deductions. Cash Balance Plans are more useful when there are multiple owners or there are employees, because they simplify tracking and allocating contributions.
