Defined Benefit Plans are typically the most complex and expensive plans to administer out of all the types we have discussed in this section. They are designed to provide a certain predetermined benefit to employees when they retire, like a pension plan.
Annual contribution limits are not governed by the same rules as the plans described previously. Rather, they are determined by the amount the employer must deposit each year to adequately fund each employee’s promised retirement benefit. Therefore, these plans allow much larger tax-deductible contributions than other types of plans.
Defined Benefit Plans require a high level of ongoing commitment, so any employers considering one should be sure they will be able to continue making significant contributions for several years. Severe penalties may be assessed for employers who do not consistently contribute as much as the plan stipulates from year to year. Also keep in mind that even larger contributions than originally planned may be required if the underlying investments do not perform as well as expected.
Typically these plans are most popular among very high-income small business owners who are close to retirement age, and who have only a few younger employees with fairly low salaries.
For more info on Defined Benefit Plans, click here.