The $300K shelter.
If you're 45+ and earning big.
The defined benefit (DB) pension is the highest-deduction retirement plan the tax code allows. A solo neurologist netting $500K can shelter a quarter-million dollars a year — and combine the DB with a Solo 401(k) profit-share for even more.
The 60-second pitch
Defined contribution plans (SEP, Solo 401(k), profit-share) cap your annual contribution. A defined benefit plan flips the math: you set a target retirement benefit, and an actuary calculates the contribution required today to hit it.
For a high earner age 45-60, that contribution can be $100,000 to $300,000+ per year. The IRC §415(b) annual benefit ceiling is $280,000 for 2024 and $285,000 for 2025 (Notice 2024-80). To fund that benefit, especially as you approach retirement, the math demands massive front-loaded contributions — and every dollar is deducted on your business return.
The cash balance plan variant is a hybrid DB that's easier to administer and has more predictable contributions. Both can be stacked with a Solo 401(k) profit-share (limited to 6% of comp on the 401k side when combined). The setup costs — actuary + TPA — run $2,000-$5,000/year, but for a $250K contribution, the ROI is staggering.
The $92,000 federal-tax cut
Dr. Wu is 55, runs a solo neurology practice taxed as an S-corp, and pays herself $345K W-2 wage + takes $155K distributions on $500K net business income. She has no employees. Her actuary designs a defined benefit plan targeting a $280K/year retirement benefit at age 62.
| Actuarially-calculated DB contribution | $250,000 |
| Stacked Solo 401(k) deferral + catch-up | $30,500 |
| Solo 401(k) employer 6% of comp | $20,700 |
| Total annual contributions | $301,200 |
| Federal tax saved (37% top bracket + 0.9% Medicare) | $114,154 |
| PA state tax saved (3.07%) | $9,247 |
| Less: actuary + TPA fees (deductible) | −$4,500 |
The step-by-step checklist
- Confirm you have the profile. DB plans work best for: (1) age 45+, (2) net business income consistently $300K+, (3) no full-time non-spouse employees (or all employees are highly compensated), and (4) a 10+ year runway before retirement to amortize the actuarial cost.
- Hire a TPA (third-party administrator) with an enrolled actuary. Names to know: Pension Resources, Pension Maxima, Cash Balance Coach, BPAS, Definiti, FuturePlan. Expect $2K-$5K/year for design + administration.
- Choose plan type: traditional DB (defined annual pension benefit), cash balance (hypothetical account with pay credit + interest credit), or combo (DB + 401(k) profit-share stacked). Cash balance is more common for solos because it's easier to communicate.
- Establish plan by year-end. Plan documents signed by Dec 31 to take that year's deduction. SECURE Act extends some flexibility but Solo DB plans still need year-end establishment.
- Fund by tax-return + extensions deadline. 8.5-month grace period (Sept 15 for calendar-year corporations; Oct 15 for individuals).
- Have the actuary file Schedule SB and Form 5500-SF annually. Solo plans under $250K can use the simpler 5500-EZ. Above $250K assets or with non-spouse participants: 5500-SF.
- Commit to fund for at least 3-5 years. DB plans aren't designed for one-off contributions. The IRS expects ongoing funding — termination after a single year can be challenged as a sham.
- Plan the exit. Once fully funded, terminate the plan and roll the balance into an IRA. Most actuaries plan a 5-10 year "funding window" before transition.
The law — cite this in your file
- IRC §401(a) Qualified plan rules. The general qualification framework for all tax-qualified retirement plans.
- IRC §415(b) The benefit ceiling. Max annual benefit at age 62-65 is the lesser of (a) 100% of average comp for highest 3 years, or (b) $280,000 (2024) / $285,000 (2025) (Notice 2024-80). This is what drives the huge contributions.
- IRC §404(o) Deduction limit. Employer contribution deduction limit for DB plans — generally up to the cushion amount equal to 50% of the funding target.
- IRC §412 Minimum funding standards. The actuary's annual minimum required contribution. Skipping it triggers §4971 excise tax (10% on the unfunded amount).
- IRC §411(b)(5) Cash balance plan rules. The "applicable defined benefit plan" provisions added by the Pension Protection Act of 2006.
- IRC §401(a)(17) Compensation cap. $345,000 (2024) / $350,000 (2025) — DB benefit accruals can only use compensation up to this limit.
- IRC §415(d) COLA adjustments. The benefit and comp limits adjust annually for inflation per IRS announcements.
- IRC §4971 Excise tax on funding deficiency. 10% on the deficiency, escalating to 100% if uncured. Don't miss funding.
Audit risk flags
- Aggressive actuarial assumptions. Some TPAs use low interest-rate assumptions to inflate contributions. The IRS audits abusive DB plans heavily — pick a TPA who'll defend their assumptions.
- One-and-done funding. Setting up a DB plan, contributing $250K, then terminating after Year 1 looks like a sham. Commit to 3-5 years minimum.
- Excluding eligible employees. If you have part-time staff who meet the eligibility thresholds (generally age 21 + 1 year of service), you must include them — and that destroys the math. Audit your roster.
- Over-funding. Once the plan is fully funded, the excess can't come back without a 50% reversion excise tax (IRC §4980) plus regular income tax — a 90%+ haircut. Plan the glide path.
- Skipping the actuary. DB plans require an enrolled actuary (PBGC + Schedule SB). Self-administered DB plans don't exist.
- Missing Form 5500. Solo DB plans over $250K must file annually. Penalty: $250/day. DFVCP correction available if self-reported.
- Prohibited transactions. Same §4975 rules as any qualified plan — self-dealing destroys the plan and triggers tax on the entire balance.
When not to use a DB plan
- You're under 45. The actuarial math requires fewer years to fund the benefit as you age. For someone under 45, the contribution may not be much higher than what a Solo 401(k) already allows — without the complexity.
- Income is unpredictable. DB plans demand contributions every year. If your income could drop 50% next year, you'll be forced to underfund (excise tax) or fund anyway (cash crunch).
- You have non-owner employees. Including them in the DB plan can balloon the cost beyond your savings. Cash-balance plans with strategic age-weighting can sometimes thread this needle — but always run the full census math.
- You expect to retire / sell the practice in <5 years. Setup + funding window doesn't make sense. Use a SEP or Solo 401(k) instead.
- You can't commit to the funding schedule. A DB plan is a multi-year promise. Missing the §412 minimum triggers §4971 excise tax.
- Total income under $200K. The Solo 401(k) already gets you to $70K shelter. The complexity of DB rarely pencils below ~$300K net.
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