Defined Benefit Plans Are Not Extinct

Posted on Mar 7, 2023

While it’s true that many private companies have switched from defined benefit plans to defined contribution plans (such as 401(k) plans), it’s worth considering whether a defined benefit plan would benefit you as a business owner and help you meet your tax and savings goals. Generally, the employer makes the most contributions in a defined benefit plan, although sometimes voluntary contributions by employees are permitted or required.

Unlike a defined contribution plan in which employees make most contributions and assume investment risk, defined benefit plans offer employees a fixed, pre-established benefit at retirement, usually a monthly income. You, as the employer and plan sponsor, assume the investment risk. However, there are advantages to the employer as well, which include the following:

• Your business can generally contribute (and deduct) more than under other retirement plans.
• Defined benefit plans are prized by employees because they provide a predictable benefit. Therefore, having a defined benefit plan can attract and retain top talent.
• Substantial benefits can be provided and accrued within a short time, even with early retirement.
• The employer can have other retirement plans.
• The business can be of any size.
• Vesting can be immediate or spread out over a period of 7 years.

Generally, businesses that have predictable earnings and long-term viability are best-suited for a defined benefit plan because there are consequences if required contributions are missed. Defined benefit plans can also be more complex to administer. Companies with defined benefit plans must file a Form 5500 with a Schedule SB on an annual basis.

Watch this video for more information on how a defined benefit plan can benefit you, your employees, and your business.