Defined benefit plan

What a defined benefit plan is

Traditional pensions and cash balance plans are both defined benefit plans. The plan document states a benefit formula. An actuary calculates how much the employer must contribute each year to fund it, and the employer must make that contribution whether or not the business had a good year. Most private-sector plans are insured by the Pension Benefit Guaranty Corporation. In 2026 the annual benefit is capped at $290,000.

Why it matters to employers

Most small and mid-size companies offer a defined contribution plan such as a 401(k). A defined benefit plan comes up when owners want larger deductible contributions than a 401(k) allows, or when you acquire a company that has a pension. The obligations are long-term: ending the plan means funding every promised benefit.

Example

A plan pays 1% of final average pay for each year of service. An employee who retires with 20 years and $100,000 of final average pay receives $20,000 a year for life, starting at the plan’s normal retirement age.

Common mistakes

• Underestimating how much required contributions can change from year to year.

• Missing the annual actuarial certification and the Schedule SB that goes with Form 5500.

• Freezing or reducing future benefits without giving participants the advance notice ERISA requires.