Defined Benefit Plans for Small Business Owners: How to Shelter $200,000+ Per Year

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

For high-income business owners who want to shelter far more than the $70,000 combined limit of a 401(k), the defined benefit plan is the most powerful retirement tool in the tax code. While a Solo 401(k) maxes out at $70,000 per year (2025, including catch-up for ages 60-63), a defined benefit plan can allow annual deductible contributions of $100,000 to $280,000 or more, depending on the owner’s age, compensation, and the plan’s assumed investment return. The plan promises a specific annual benefit at retirement (up to $280,000/year for 2025, indexed for inflation), and the contribution required each year is whatever the plan’s actuary determines is needed to fund that promised benefit. Because older participants need to fund the same benefit over fewer years, the required (and deductible) contribution increases dramatically with age. A 55-year-old business owner can typically contribute 2x to 4x what a 40-year-old can contribute, making defined benefit plans especially attractive for business owners in their late 40s, 50s, and early 60s.

✓Key takeaway

Defined benefit plan contribution limits by age:

Age	Approximate Annual Contribution (to fund $280,000 annual benefit at 62)	Solo 401(k) Max	Excess Over 401(k)
40	$50,000-$80,000	$70,000	($20,000) to $10,000
45	$80,000-$120,000	$70,000	$10,000-$50,000
50	$120,000-$180,000	$70,000	$50,000-$110,000
55	$180,000-$250,000	$70,000	$110,000-$180,000
60	$230,000-$280,000+	$70,000	$160,000-$210,000+

Defined benefit vs. defined contribution:

Feature	Defined Benefit Plan	401(k) / SEP-IRA
Contribution limit	Based on age and benefit formula	$70,000 (401(k), 2025) or 25% of comp (SEP)
Who bears investment risk	Employer (must fund promised benefit)	Employee (account balance fluctuates)
Annual actuarial requirements	Yes (actuary required every year)	No
Annual administration cost	$2,000-$5,000+	$0-$1,500
Best for ages	45+	Any age
Can combine with 401(k)?	Yes (DB + 401(k) combination plan)	N/A
Contribution flexibility	Limited (actuarial requirement sets minimum and maximum)	High (contribute any amount up to limit)

How much more can a defined benefit plan shelter?

Hypothetical example

Round numbers. A 55-year-old sole proprietor (S-Corp) with $400,000 of W-2 income from the business. No employees other than the owner.

Option A: Solo 401(k) only

Item	Amount
Employee deferral ($23,500 + $11,250 super catch-up age 60-63, but owner is 55, so regular $7,500 catch-up)	$31,000
Employer contribution (25% of $400,000, limited)	$39,000
Total contribution	$70,000
Tax savings (37% bracket)	$25,900

Option B: Defined benefit plan only

Item	Amount
Annual benefit target (actuary-determined, max $280,000/year at 62)	$280,000
Required contribution to fund benefit (age 55, 7 years to 62, 5% assumed return)	~$220,000
Total contribution	$220,000
Tax savings (37% bracket)	$81,400

Option C: Defined benefit + 401(k) combination

Item	Amount
Defined benefit contribution	$220,000
401(k) employee deferral	$31,000
401(k) employer contribution (limited by DB)	$0-$10,000 (limited when combined with DB)
Total contribution	$251,000-$261,000
Tax savings (37% bracket)	$92,870-$96,570

Comparison:

Plan	Annual Contribution	Tax Savings (37%)	Additional Over 401(k)
Solo 401(k)	$70,000	$25,900	Baseline
Defined benefit only	$220,000	$81,400	$55,500 more savings
DB + 401(k) combo	$251,000	$92,870	$66,970 more savings

10-year impact (age 55 to 65, contributing to DB + 401(k)):

Metric	Solo 401(k)	DB + 401(k) Combo	Difference
Total contributions over 10 years	$700,000	~$2,510,000	+$1,810,000
Total tax savings over 10 years	$259,000	~$928,700	+$669,700
Estimated account value at 65 (6% growth)	~$965,000	~$3,450,000	+$2,485,000

Employee coverage requirements: If the business has employees, the defined benefit plan must cover eligible employees on a non-discriminatory basis:

Factor	Implication
Eligibility	Generally, employees with 1 year of service and age 21+ must be covered
Benefit formula	Must be uniform (same formula for all participants)
Cost for employees	The employer must contribute to fund employee benefits (cost depends on employee ages and compensation)
Younger employees cost less	A 30-year-old employee’s benefit costs much less to fund than a 55-year-old owner’s benefit
”Comparability” plans	Some plan designs maximize the owner’s benefit while minimizing employee cost

Example with employees:

Participant	Age	Compensation	Estimated Annual DB Cost
Owner	55	$400,000	$220,000
Employee A	30	$50,000	$3,000
Employee B	35	$45,000	$3,500
Employee C	28	$40,000	$2,000
Total plan cost			$228,500

The owner receives 96% of the total plan contributions. The employee cost ($8,500) is minimal compared to the owner’s tax savings.

When NOT to use a defined benefit plan:

Situation	Why Not
Income below $150,000	401(k) or SEP-IRA provides sufficient shelter
Income fluctuates significantly	DB plans have MINIMUM funding requirements; if income drops, you still owe the contribution
Many employees (especially older employees)	Employee cost becomes prohibitive
Under age 40	401(k) limits are usually sufficient; DB contribution advantage is small
Planning to sell the business soon	Plan must continue for a reasonable period; terminating too quickly raises IRS scrutiny
Need contribution flexibility	DB has mandatory minimums and maximums set by actuary; 401(k) is fully discretionary

Plan termination and distributions:

Action	Tax Treatment
Receive lump-sum at retirement	Fully taxable as ordinary income (can be devastating in one year)
Roll to IRA	Tax-deferred; take distributions over time
Convert to Roth IRA	Pay tax on rollover; future distributions tax-free
Annual pension payments	Taxable as ordinary income each year
Required minimum distributions (RMD)	Begin at age 73 (2025) for traditional; Roth IRAs have no RMD during owner’s lifetime

The cash balance plan alternative: A cash balance plan is a type of defined benefit plan that looks like a defined contribution plan to participants (each participant has a “hypothetical account balance” with a guaranteed return), but is funded and deducted like a defined benefit plan:

Feature	Traditional DB	Cash Balance Plan
Benefit definition	Annual payment at retirement	Account balance at retirement
Participant sees	Future pension amount	Current account balance
Contribution flexibility	Set by actuary (less flexible)	Set by actuary (moderate flexibility)
Employee communication	More complex	Simpler (looks like a 401(k) to employees)
Contribution levels for owners	Similar	Similar

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Defined Benefit Plans for Small Business Owners: How to Shelter $200,000+ Per Year." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-defined-benefit-pension-plan-tax-deduction

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Defined Benefit Plans for Small Business Owners: How to Shelter $200,000+ Per Year

How much more can a defined benefit plan shelter?

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