The Defined Benefit Plan: A Tax-Deferred Retirement Option for High-Income Practice Owners

For a high-earning practice owner, a 401(k) alone often does little against a tax bill driven by strong practice income, because the contribution limits on ordinary retirement accounts are relatively low. There is another type of qualified retirement plan designed for owners who want to set aside larger, deductible amounts: the defined benefit plan. This guide explains how a defined benefit plan works, what the IRS permits in 2026, and the rules and obligations that come with it, so a high-income practice owner can evaluate whether it fits.

Defined Benefit vs. Defined Contribution

Retirement plans fall into two categories under the Internal Revenue Code. In a defined contribution plan, such as a 401(k), the plan sets a limit on what goes in, and the retirement balance is the result of those contributions and their investment growth. For 2026, the total annual additions to a defined contribution plan for one participant are limited to $72,000 under Section 415(c), and the 401(k) elective deferral limit is $24,500.

A defined benefit plan is structured differently. Rather than limiting the contribution, the Code limits the benefit the plan may provide at retirement, and the annual contribution is the amount actuarially required to fund that benefit. Because the plan is funded toward a defined future benefit rather than a fixed annual contribution cap, the deductible contributions required to fund it can be larger than the amounts permitted in a defined contribution plan. The size of that contribution is determined by actuarial calculation, not by a flat figure.

What the IRS Permits: The Section 415 Benefit Limit

A defined benefit plan is governed by a benefit limit rather than a contribution limit. Under Section 415(b) of the Internal Revenue Code, the maximum annual benefit a defined benefit plan may provide for 2026 is the lesser of $290,000, or 100% of the participant's average compensation for their highest three consecutive years. Separately, Section 401(a)(17) sets the maximum compensation that may be taken into account in the plan's benefit formula at $360,000 for 2026. Both figures are set by the IRS in Notice 2025-67 and are adjusted periodically for cost of living.

It is important to read these figures correctly. The $290,000 amount is the ceiling on the annual retirement benefit the plan may provide; it is not a contribution amount. The deductible contribution required each year is calculated by an actuary to fund the plan's benefit obligation, and that calculation depends on factors including the participant's age, compensation, and the plan's assumptions. Because the contribution is actuarially determined, this article does not state a specific contribution figure; the amount depends on the individual plan and participant.

The Tax Treatment: Deductible and Tax-Deferred

Employer contributions to a qualified defined benefit plan are deductible under Section 404 of the Internal Revenue Code, subject to that section's limitations, which reduces the sponsoring practice's taxable income in the year the contributions are made. Amounts held in the plan are not taxed until they are distributed, so the funds grow on a tax-deferred basis until retirement. For a high-income practice owner, this combination of a current deduction and tax-deferred growth is the core reason a defined benefit plan is used as part of retirement and tax planning.

The Cash Balance Plan

A cash balance plan is a type of defined benefit plan. It is subject to the same defined benefit rules under the Code, including the Section 415 benefit limit, but it expresses each participant's benefit as a stated account balance rather than as a monthly annuity at retirement. Because the Section 415 limits for defined benefit plans and defined contribution plans apply independently, an employer may sponsor both a defined benefit (or cash balance) plan and a defined contribution plan such as a 401(k), subject to the rules governing each.

The Obligations: Required Funding and Actuarial Certification

A defined benefit plan carries obligations that a defined contribution plan does not, and these are set by the Code rather than being optional features:

• Minimum required contributions. Under Section 430 of the Internal Revenue Code, a single-employer defined benefit plan must meet a minimum required contribution for each plan year. Contributions are not discretionary in the way 401(k) contributions can be.

• Excise tax for underfunding. Under Section 4971, an excise tax applies to any unpaid minimum required contribution, which is why meeting the funding obligation each year matters.

• Annual actuarial involvement. Because both the required contribution and the funding target are actuarial determinations, a defined benefit plan requires an enrolled actuary's calculations and certification each year, reported to the IRS.

These obligations are the reason a defined benefit plan is generally suited to a business with income sufficient to support required contributions consistently. An owner whose income varies significantly from year to year should weigh the ongoing funding requirement carefully before adopting one.

Is a Defined Benefit Plan Right for Your Practice?

A defined benefit plan can allow larger deductible retirement contributions than a defined contribution plan, but whether it is appropriate depends on your practice's income, your goals, and your ability to meet the required annual funding. Because the deductible contribution is an actuarial determination unique to each plan and participant, the only way to know what a defined benefit plan would mean for you is to have the calculation performed for your specific situation.

At Tax Wealth Consultant, we help high-income practice owners evaluate whether a defined benefit or cash balance plan fits their practice, coordinate the actuarial analysis, and structure the plan in compliance with the applicable IRS rules. This is planning built around your actual numbers.

Schedule a consultation to see whether a defined benefit plan fits your practice.

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