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Defined Benefit Plan

Defined benefit plans provide a fixed, pre-established payment to employees at retirement.

Commonly referred to as defined benefit pension plan and defined benefit retirement plan.

Do I Qualify for the Defined Benefit Plan?

A defined benefit pension plan is a type of qualified plan in which an employer or sponsor promises a specified pension payment to employees when they retire.

2022 Defined Benefit Plan Details

A defined benefit pension plan is a type of qualified plan in which an employer or sponsor promises a specified pension payment to employees when they retire. The amount is predetermined using a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment return. Employers typically make most of the contributions to defined benefit retirement plans, although some plans allow for employee contributions and others may even require them.

To be eligible for the tax benefits available to qualified plans, a defined benefit pension plan must meet certain requirements, including:

• Protection from diversion. (Plan assets can't be diverted to purposes other than the exclusive benefit of employees and their beneficiaries.)
• Compliance with nondiscrimination rules. (The plan can’t discriminate in favor of highly compensated employees.)
• Compliance with minimum coverage requirement.
• Compliance with contribution and benefits limits.
• Compliance with minimum vesting standards.
• Compliance with plan participation rules.


Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Definitely determinable benefits are based on actuarial assumptions and computations that the employer cannot make changes to. These calculations add significant complexity and cost to the administration of defined benefit plans.

Employees usually appreciate the fixed benefits these plans provide, and employers can contribute more to them than to defined contribution plans. The contributions also result in higher tax deductions for the business.

Defined Benefit Plan

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• Can have other retirement plans.
• Can be a business of any size.
• Substantial benefits can be provided and accrued within a short time, even with early retirement.
• Employers can contribute (and deduct) more than under other retirement plans.
• Plan provides a predictable benefit.
• Vesting can follow a variety of schedules (e.g., immediate, spread out over seven years).
• Benefits aren't dependent on asset returns.
• Plan can be used to promote certain business strategies by offering subsidized early retirement benefits.
• Plan may permit participant loans.


• Must file a Form 5500 with a Schedule B annually.
• Need an enrolled actuary to determine the funding levels and sign the Schedule B.
• Can’t retroactively decrease benefits.
• Most costly type of plan.
• Most administratively complex plan.
• An excise tax applies if the minimum contribution requirement is not satisfied or if excess contributions are made.
• Generally, plan may not make in-service distributions to a participant before age 62.
• Conflicting strategies: SIMPLE IRA for Businesses, SIMPLE 401(k) for Businesses.

Assumptions When Taking the Defined Benefit Plan

• The employer makes the maximum contributions allowed.

Conflicting Strategies

• Cash Balance Plan
• Section 412(e)(3) Plan
• SIMPLE 401(k) (Business)
• SIMPLE IRA (Business)

Requirements to Claim the Defined Benefit Plan

Contributions must be based on what is needed to provide definitely determinable benefits to plan participants, requiring actuarial assumptions and computations.
Defined benefit plans typically must deposit 25% of the annual amount due in each quarter of the year and may be subject to interest and penalties for any period in which they remain underfunded.
In general, the annual employee benefit cannot exceed the lesser of 100% of their average compensation for their three highest-earning consecutive calendar years or the annual maximum dollar amount (determined by the IRS).

Business Entities That Can Claim the Defined Benefit Plan

• Schedule C
• Schedule F
• S Corporation
• C Corporation
• Partnership

The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.

Prosperity Tax Advisors
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