Tax Planning
Defined Benefit Plans: When They Save High-Earning Owners Six Figures
For high-income owners with steady cash flow and few employees, a defined benefit (DB) or cash balance plan can shelter $150K–$300K+ per year — far beyond Solo 401(k) limits. The math is powerful, but it only works for a narrow profile.
Who the math works for
Owner age 45 or older. Net profit consistently above $400K. Few or zero full-time employees (or only family members on payroll). Comfort with a multi-year funding commitment.
If any of those are missing, a Solo 401(k) or SEP is usually a better fit.
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Why age and income drive the deduction
DB contribution limits are actuarially derived to fund a target retirement benefit. Older owners have fewer years to fund that benefit, so the annual deduction is larger.
A 55-year-old owner can often contribute 2–3x what a 40-year-old can, for the same target benefit.
The employee coverage problem
DB plans cannot discriminate in favor of the owner. If you have W-2 employees who meet eligibility, you must fund proportional benefits for them — which can erase most of the owner's savings.
This is why DB plans usually only make sense for solo owners, owner-and-spouse setups, or partnerships where every partner wants to fund.
The funding commitment is real
DB plans are not one-year tools. The IRS expects ongoing funding for several years to keep the plan qualified. Skipping a year can trigger excise taxes and disqualification.
Before adopting, model the funding obligation under a recession scenario. If the answer is 'we couldn't pay it,' the plan isn't the right tool yet.
Cash balance plans as a hybrid
Cash balance plans are a flavor of DB plan with stated account balances that are easier to communicate to owners and partners. They are popular in professional services firms (law, medicine, consulting) for the same reasons traditional DB plans work for solo owners.
Frequently asked questions
Can I have both a Solo 401(k) and a defined benefit plan?
Yes. The most common high-income owner setup is a Solo 401(k) for the elective deferral plus a DB or cash balance plan layered on top for the larger employer contribution.
How long do I have to keep the plan funded?
Plan on a minimum three-to-five-year commitment. Plans terminated earlier than that can attract IRS scrutiny and may require justifying the short life — usually a business sale, downturn, or owner retirement.
Do I need an actuary?
Yes. Defined benefit and cash balance plans require an enrolled actuary to certify funding annually. Most third-party administrators (TPAs) include actuarial work in their fee.
Want to apply this to your situation?
Book a consultation with a Kuuni Partners advisor — Georgia-based, serving clients nationwide.
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