Quick guide · 3 min read
Defined benefit plan
A defined benefit plan, often set up as a cash balance plan, targets a set benefit at retirement and works backward to a yearly contribution. For older owners with high, steady profits, the deduction can be several times what a 401(k) allows.
- Who it fits
- Consistently profitable owners, usually 45 or older, with income to spare.
- Usually not a fit
- Businesses with uneven profit or many employees.
- Figures
- 2026 tax year
The key rule
Contributions are set by an actuary each year based on your age, pay and the target benefit. The maximum annual benefit for 2026 is $290,000, and older owners can often contribute well over $100,000 a year.
How it works
A 401(k) limits what goes in each year. A defined benefit plan limits what comes out: the pension it can promise at retirement. The closer you are to retirement, the less time the plan has to build that benefit, so the yearly contribution an actuary allows rises with age.
Most small-business plans today are cash balance plans. Each year your account is credited with a pay credit and an interest credit, and the plan shows a simple account balance, much like a 401(k).
5 steps
Check the fit
These plans work best when profit is high and steady for at least three to five years. Contributions are required each year within a range, not optional.
Hire a plan administrator
A third-party administrator and actuary designs the plan, runs the yearly calculation and files Form 5500. Expect a few thousand dollars a year in fees.
Pair it with a 401(k)
Most owners run a defined benefit plan alongside a 401(k) for the largest combined deduction.
Fund it on time
Contributions are generally due by the business's filing deadline, including extensions.
Plan the exit
When you retire or close the business, the plan is terminated and the balance usually rolls into an IRA.
Example
A 52-year-old owner
Your S corp pays you $250,000 and earns steady profit above that. An actuary sets an allowed range of about $150,000 to $200,000 a year for a cash balance plan. Paired with a solo 401(k), you could deduct more than $200,000 a year, saving tens of thousands in tax at your rate.
Common mistakes
- Closing the plan after only a year or two can raise questions. Plan to keep it for several years.
- If you have employees, they must usually be included.
- Investing too aggressively. Large swings can force bigger or smaller required contributions.
Key dates
- Business filing deadline
- Usual contribution deadline.
- July 31
- Form 5500 filing for calendar-year plans.
Questions we hear
Can I set one up late in the year?
Plans generally need to be adopted by the business's filing deadline for the year, but talk to an administrator by the fall so the design is ready.
What happens if profit drops?
Contributions can often be reduced within the actuary's range, and the plan can be amended. A plan should not be started if profit is unlikely to stay high.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.