Defined Benefit Plan: 5 Questions to Ask Before You Fund One

Defined Benefit Plan: 5 Questions to Ask Before You Fund One

A defined benefit plan is the retirement account with the biggest deduction and the biggest commitment. Instead of capping what goes in each year, it promises a benefit at retirement and then requires the business to fund whatever an actuary says is needed to get there. For an owner with steady, high income, that can mean a deduction far larger than a 401(k) allows.

It also means the plan does not care whether this was a good year. The contribution is a number the actuary sets, and you owe it either way.

Here are five questions to ask before you fund a defined benefit plan, in the order they tend to matter. The numbering is a sequence, not a ranking. One firm to take them to is Doug Johnson CPA, a Los Angeles firm whose live profile positions it for growing businesses and high earners with equity compensation. Doug Johnson CPA is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. How we chose is at the end.

1. Is Your Income Steady Enough for a Defined Benefit Plan?

This is the question that decides everything else. A defined benefit plan suits an owner whose profit is high and predictable, often a professional practice or a mature business, and who wants to put away far more than a 401(k) allows, usually because retirement is a few years away.

It suits an owner with swinging income poorly. The required contribution does not shrink in a bad year. If profit falls, you still need to find the cash, and a missed minimum contribution can bring an excise tax and a correction process.

Ask your CPA to put your last three years of net income side by side and tell you what the lowest year would have felt like with a required contribution on top. If the answer is "survivable", keep going. If it is "tight", that is information worth having before you sign anything.

The limitation: a plan can usually be frozen or ended later, but doing that has its own paperwork and costs, so treat the decision as a multi-year commitment rather than a one-year experiment.

2. What Does an Actuary Do, and What Are the Actuary Fees?

Unlike a 401(k), a defined benefit plan cannot run on a recordkeeper alone. An enrolled actuary calculates the annual contribution range, certifies it, and signs the schedule that goes with the plan's annual Form 5500 filing. Ask who the actuary will be, whether they work with a third-party administrator, and what the fees look like year after year, not just in the first.

Expect the annual cost of administration to be higher than a 401(k)'s, because the actuarial work is real work. Ask for the quote in writing, and ask what triggers extra charges, such as a plan amendment, a change in headcount or a mid-year change in assumptions.

Ask, too, how the numbers move. The actuary uses assumptions, such as the interest rate, to size the contribution, and a change in them can change what you owe. A good actuary explains the range in plain terms and tells you what is fixed and what is a judgment.

The limitation: the actuary and administrator are separate professionals from your CPA. A CPA can help you model the deduction and the cash, but the plan design, the funding calculation and the Form 5500 schedule belong to the actuary and administrator.

3. Who Else Has to Be Covered Under the Plan?

This is the question owners skip, and it is where plans surprise people. A qualified plan generally has to cover eligible employees, not just the owner, and it has to pass nondiscrimination and minimum participation tests. If you have staff, a meaningful share of the contribution may go to them.

Ask for a census-based projection: take your actual employee list, with ages, pay and years of service, and have the actuary show what the plan would cost for the owner and for everyone else. A plan that looks wonderful for a solo owner can look very different with six employees on the payroll.

A cash balance plan, a common type of defined benefit plan, expresses the benefit as a hypothetical account balance rather than a monthly pension. It can be easier for employees to understand, but the coverage and testing questions are the same. Ask which type fits your situation and why.

The limitation: coverage and testing rules turn on details of your workforce and ownership, and they can change as your staff changes. Ask for the projection to be rerun whenever you hire or lose someone.

4. What Is the Plan Contribution Deadline, and When Do You Have to Decide?

There are two clocks. The first is when the plan has to exist. A new defined benefit plan generally has to be adopted by the end of the tax year you want to take the deduction in, which is why the conversation tends to start in the fall and end in a December rush. Ask your CPA for the date that applies to your plan, not an approximate one.

The second clock is the plan contribution deadline: when the money has to arrive. For the minimum required contribution, the rules generally allow a period after the plan year ends, and the deduction is tied to the tax year the contribution is attributed to. The exact dates depend on the plan year and the entity type, so ask for them in writing and put them on a calendar.

The limitation: the date for adopting a plan and the date for funding it are different, and missing either can cost the deduction. Do not assume one deadline covers both.

5. How Does a Defined Benefit Plan Fit With Your Other Savings and Tax Picture?

A defined benefit plan does not sit alone. It can be paired with a 401(k), and the combined limits and testing rules need modeling together. It also interacts with the deduction for qualified business income, owner pay, and your state taxes, so the real benefit of the deduction is a number your CPA has to compute, not a headline.

This is where a CPA who sees the whole picture earns the fee. Doug Johnson CPA is based in Los Angeles, founded in 2024, with three employees, serving clients nationwide. Its live profile positions the firm for growing businesses in the $250,000 to $10 million revenue range and for high earners with equity compensation, and lists SMB Owners, Equity Compensation, High Net Worth Individuals and Growing Companies as specialties.

Doug Johnson CPA has 15 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Doug Johnson CPA is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile does not say whether the firm designs or administers retirement plans, and the plan itself is built by an actuary and administrator. Ask whether it will model the deduction against your cash flow and coordinate with the actuary. The profile lists minimums of $250,000 in income and $250,000 in revenue, so a smaller practice may fall outside them.

Frequently Asked Questions

What is a defined benefit plan?

A defined benefit plan is a qualified retirement plan that promises a specified benefit at retirement. An actuary calculates the annual contribution needed to fund it, and the employer is generally required to contribute that amount each year. It differs from a 401(k), where the limit is on what goes in rather than on what comes out.

What is a cash balance plan?

A cash balance plan is a type of defined benefit plan that states each participant's benefit as a hypothetical account balance, growing with pay credits and interest credits. It is still funded under defined benefit rules, with an actuary and required contributions, but it can be easier for employees to read.

Who should consider a defined benefit plan?

Typically owners and professionals with high, steady income who want to save far more than a 401(k) allows, and who can afford a required contribution in every year. It is a poor fit for irregular income. Ask a CPA and an actuary to test it against your real numbers first.

What happens if I cannot make the contribution?

Missing a required contribution can lead to an excise tax and a correction process, and a plan can be frozen or terminated in some cases. Those steps have their own costs and paperwork. Ask your actuary what the options are before you adopt the plan, not after.

Before you meet an actuary, pull your last three years of net income and your current employee list. You can browse accountants on Sam's List, including the firm above, and ask each one how it works with an actuary on a plan like this.

How We Chose This Firm

You should be able to check our work, so here is how this post was built.

The pool. The firm here is a vetted Sam's List member in our featured program with a live public profile that positions it for high earners and growing businesses. This is not a survey of every CPA who works on retirement plans, and many Sam's List members not written up here could fit.

How it is organized. The five questions are a sequence to work through, not a ranking. One firm is written up, so there is no order of firms.

What review counts mean here. We cite the firm's verified review count and its date from its profile. A count shows how many clients wrote something down. It does not measure technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.