Choosing a Defined Benefit Plan

April 1, 2021

Are you a small business looking for a retirement plan for your employees? A defined benefit plan provides a pre-determined benefit for participants at retirement. These types of plans typically allow for larger contributions (and deductions) than other types of plans but are expensive to maintain. Do you think a defined benefit plan would be a good fit for your business? Some of the key features of this type of plan are discussed below.

Key Features

  • Available to all employers
  • Plan provides a predictable benefit at retirement
  • Employers can typically make large, tax deductible contributions
  • Employee contributions can be mandatory or voluntary
  • Plan administration is more costly than other plans and requires the use of an actuary

Eligible employee

You must generally include any employee (including yourself) in the plan who:

  • Is at least age 21, and
  • Has performed 1,000 hours of service

You can choose to use less restrictive eligibility requirements.

Contributions to a defined benefit plan

Generally, the employer makes most contributions. Some plans may require or permit voluntary contributions. Employers are required to make contributions to meet the retirement benefit stated in the plan. An actuary must determine how well the plan is funded each year, and part of this analysis will include the calculation of the required minimum contribution. This is the minimum amount the employer should contribute to the plan. Thus, employer contributions will normally fluctuate from year to year.

Withdrawals and loans from a defined benefit plan

In-service distributions are not typically allowed from a defined benefit plan before the participant reaches age 59 ½. Note that distributions from a defined benefit plan can be further limited if the plan is not properly funded. A defined benefit plan can provide for participant loans, which must be paid back to the plan.

Setting up a defined benefit plan

Contact a plan administrator or an actuary for help to set up your plan. Complete and sign an IRS pre-approved defined benefit plan document or an individually designed plan document. Distribute copies of the plan document or Summary Plan Description to employees.