Defined Benefit Pension Plans

As business owners get closer to retirement, they commonly find that they have done their retirement planning for their employees rather than for themselves.  This presents both a need and an opportunity. 

The need: if the business has maintained a 401(k) plan, for example, only a small portion of the business owner's retirement needs have been funded due to contributions limits imposed on such plans. Such a business owner needs a chance to fund a significant amount of tax-deductible contributions into a defined benefit plan for himself.

The opportunity: a business can create a defined benefit pension benefit in addition to benefits provided by a 401(k) (or other defined contribution) plan. And benefits may be slanted toward older and highly-compensated employees.

Defined benefit pension plans have fallen into disfavor in some quarters.  This is because many large companies and unions obligated themselves to pay pensions that they can no longer afford.  However, the defined benefit model still works great for small closely-held businesses which do not employ a lot of rank and file employees or whose rank and file employees are covered under a collective-bargaining agreement.

Of course, as with the larger companies, small companies should not adopt such a plan unless they have the earnings and can make a commitment to fund it for at least 5 years.  However, such small businesses are in an ideal position to obtain the benefit of additional tax deductions.  There is no maximum contribution which may be made to a defined benefit pension plan; however, contributions must be actuarially-determined within the applicable IRS and statutory guidelines.

Finally, defined benefit pension plans tend to favor older employees over younger employees, and are generally inappropriate where the group of employees to be favored is below age 45.

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