Should I consider a defined benefit plan?
Depends on age, income stability, and staff
A defined benefit plan promises a retirement benefit, and the employer must fund it each year based on an actuary's calculation. IRC §415(b) limits the annual benefit to the lesser of $290,000 for 2026 or 100% of average compensation for the highest three years. For older owners with steady income, required contributions can exceed defined contribution limits, but missed funding triggers excise taxes.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- 2026 benefit limit: lesser of $290,000 or 100% of high-3 average compensation; compensation counted up to $360,000.
- The dollar limit phases in over 10 years of participation.
- Contributions are set by an enrolled actuary and are required each year.
- Unpaid minimum required contributions trigger an excise tax under IRC §4971.
- Eligible employees must be covered, and the plan is meant to be permanent.
What it is
A defined benefit plan is a traditional pension. It promises a benefit at retirement, often expressed as an annual amount for life, based on a formula using pay and years of service. The employer bears the investment risk and must contribute enough to fund the promised benefits.
For a business owner in their 50s or 60s with high and stable income, the short time to retirement can require large annual contributions, which are generally deductible. That is why these plans are used to accumulate retirement savings faster than a 401(k) alone allows.
What the law says
IRC §415(b)(1) limits the annual benefit to the lesser of a dollar amount, $290,000 for 2026 under IRS Notice 2025-67, or 100% of the participant's average compensation for the highest three years. Under §415(b)(5), the dollar limit is reduced for participation of fewer than 10 years, and the compensation limit is reduced for fewer than 10 years of service.
IRC §430 sets minimum funding requirements for single-employer plans, and IRC §4971 imposes an excise tax on unpaid minimum required contributions. IRC §404(o) governs the deduction, and IRC §404(a)(7) limits combined deductions when an employer also sponsors a defined contribution plan.
Requirements and tests
A defined benefit plan must meet these requirements:
- A written plan document and an enrolled actuary who determines required contributions each year.
- Minimum required contributions paid on time, including quarterly installments when required.
- Coverage and nondiscrimination requirements met for eligible employees, including minimum participation under IRC §401(a)(26).
- Benefits within the §415(b) limits and compensation within the $360,000 limit for 2026.
- Annual Form 5500 or 5500-EZ with the actuary's Schedule SB, as applicable.
- A plan intended to be permanent; terminating after only a few years can be questioned unless there is a valid business reason.
- PBGC premiums and coverage, unless an exemption applies, such as a plan covering only substantial owners.
How it works
The actuary uses your age, compensation, the plan formula, and required assumptions to compute a range of permissible contributions for the year, from the minimum required contribution to the maximum deductible amount. You fund an amount within that range. If investments underperform, future required contributions rise; if they outperform, they fall.
Many owners pair a defined benefit plan with a 401(k). The combination can allow larger total contributions, subject to the combined deduction limit and to nondiscrimination testing if you have employees.
Retirement benefits are paid as an annuity or, if the plan allows, as a lump sum that can be rolled to an IRA. When the plan terminates, all benefits must be funded and distributed, and a plan that is overfunded at termination can face an excise tax on reversions to the employer.
Assumptions: Tax year 2026; owner age 55 with average compensation of $250,000 over the highest three years.; Owner will have at least 10 years of participation and service at retirement.; Actual contributions depend on the actuary's calculation and are not estimated here.
| §415(b) dollar limit for 2026 | $290,000 |
|---|---|
| 100% of high-3 average compensation | $250,000 |
| Maximum annual benefit the plan can fund toward | $250,000 |
| Same owner with only 5 years of participation (dollar limit reduced 5/10) | $145,000 |
| For comparison: 2026 defined contribution limit at age 55 ($72,000 + $8,000) | $80,000 |
The plan can fund toward an annual benefit of up to $250,000 for this owner, and the actuary converts that target into a required yearly contribution that may exceed the $80,000 defined contribution limit.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The largest risk is the funding obligation. A business downturn does not suspend it, and unpaid required contributions trigger an initial 10% excise tax, with a larger tax if not corrected. Examiners review benefit limits, actuarial assumptions, coverage, deduction limits, and plans terminated soon after they started.
Administrative costs, including actuarial fees and filings, are higher than for defined contribution plans.
Plan design choices also carry risk. Assumptions about retirement age, interest rates, and the form of benefit affect both the required contribution and the lump sum a participant can take. If the plan is terminated when it is underfunded, the employer must fund the shortfall before benefits can be distributed, and owners may need to waive part of their benefit in some cases. Changes to the benefit formula must be adopted by plan amendment and usually cannot reduce benefits already earned.
Who it is not for
A defined benefit plan usually does not fit businesses with uneven income, owners who cannot commit to several years of contributions, businesses with many employees whose benefits would be costly, or younger owners who can save enough in a 401(k). It also does not fit owners who want contributions to be optional each year, or who plan to sell the business soon, because a buyer may not want to take on the plan and terminating it early requires full funding.
How ebotCPA helps
We work with an enrolled actuary to model required contributions over several years, test them against your cash flow and employee costs, coordinate the plan with any 401(k), and keep contributions and filings on schedule.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Frequently asked questions
How much can I contribute to a defined benefit plan?
It depends on your age, pay, plan formula, and actuarial assumptions. The law limits the benefit, not the contribution directly, to the lesser of $290,000 a year for 2026 or 100% of high-3 average pay.
What happens if I cannot make a defined benefit plan contribution?
Unpaid minimum required contributions trigger an excise tax under IRC §4971, and the obligation remains. Plans can sometimes be amended or frozen, but that requires careful planning.
Can I have a defined benefit plan and a 401(k)?
Yes. Many owners combine them, subject to the combined deduction limit and nondiscrimination rules if the business has employees.
Do I have to include employees in my defined benefit plan?
Generally yes, if they meet the plan's eligibility requirements. Coverage and minimum participation rules apply.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.