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. But there is no limit to how large the account can grow.
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 on this amount, which is $265,000 in 2023. Contributions are established to provide enough growth to pay the benefits “defined.” This amount is determined by an actuarial calculation every year and is tax deductible.
Defined benefit plans are the next step after establishing a defined contribution plan. By allowing them to put large sums of money away for their retirement in a tax-deductible fashion, these plans can be of great benefit to the business owners. Typically, they take the form of profit sharing and cash balance plans.
These plans are custom designed for each business, as 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.
