The 401(k) annual contribution cap is $70,000 (2025) per participant. For owners with much higher profit, $70K is a small fraction of what they could put away with the right plan. A defined benefit (DB) plan, or its modern cousin the cash balance plan, can take an owner’s tax-deferred annual contribution well into six figures.
What is a defined benefit plan
A DB plan promises a specific retirement BENEFIT (e.g., $200K/year starting at age 65). The annual contribution is whatever an actuary calculates is needed to fund that benefit, given the participant’s age, expected return assumptions, and years until retirement.
Older participants need more money funded sooner (less time to compound), so older owners get bigger contributions. That’s why DB plans work best for owners 45+ with several high-income years still ahead.
Cash balance plans
Cash balance plans are a hybrid: technically defined benefit (so the high contribution limits apply), but each participant has a "hypothetical account" that grows at a credited interest rate (often around 4-5%). The participant gets statements showing their balance. Easier to communicate. Same high contribution capacity.
Cash balance plans are now the most common form of DB plan for closely-held businesses.
What it costs
- Setup: $2,000-$5,000 for plan design and document.
- Annual administration: $3,000-$8,000 for actuarial work, 5500 filing, participant statements.
- Required staff contributions: Probably 5-7.5% of staff compensation as a "gateway" minimum to satisfy nondiscrimination. This is the big cost for employers with W-2 staff.
When it pencils
Run the math: (your DB contribution) × (your marginal tax rate) MINUS (staff cost contributions). If the net is positive (and ideally meaningfully positive), the plan pencils.
For owners with low-comp staff (say, $40K average) and high owner profit, the staff cost is small relative to the owner deduction. For owners with high-comp staff (say, $150K engineers), the staff cost can eat much of the benefit.
The lifecycle
DB plans are not permanent. Most owners run them for 5-15 years, accumulating significant assets, then freeze or terminate the plan and roll assets into an IRA. The years of high contributions during peak earning are the point.
Who should consider this
- S-corp / Schedule C owner
- Age 40+ (older is better)
- $300K+ of profit you can reliably defer
- Few or low-comp employees (or willing to fund the staff cost)
- 5-15 year runway