Defined Benefit

Qualified plans generally fall into two categories: defined contribution and defined benefit. In a defined contribution plan, like a 401(k), there is a limitation on how much you and your employees can contribute to the plan every year. There’s no limit to how large the account can grow, though.

A defined benefit plan is just the opposite, there is no limit on contributions. The business owners define the benefits the plan will pay to them and their employees through retirement. The IRS establishes a limit to this amount, which in 2022 is $245,000. Contributions are established to provide enough growth to pay the benefits “defined”. This amount is determined by an actuarial calculation every year, and is of course tax deductible.

Defined benefit plans are the next step after establishing a defined contribution plan. These plans can be of great benefit to the business owners by allowing them to put large sums of money away for their retirement in a tax-deductible fashion. Typically, these plans take the form of profit sharing and cash balance plans.

These plans are custom designed for each business so each situation is unique. An initial feasibility study is required. There is no cost for the feasibility study and these usually take 1-2 weeks.

Verified by MonsterInsights