A Defined Benefit Plan, sometimes referred to as a pension plan, is one of the most powerful—and commonly overlooked—tax-advantaged strategies available to business owners. When structured properly, these plans can generate six- or even seven-figure tax deductions while creating predictable, long-term retirement income.
Yet despite their advantages, defined benefit plans are often misunderstood or ignored entirely.
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Who Can Benefit From a Defined Benefit Plan?
Defined benefit plans are available to a wide range of business entities, including:
Sole Proprietors
S-Corporations
C-Corporations
Partnerships
Limited Liability Companies (LLCs)
Family Limited Partnerships
While these plans are most commonly used by pass-through entities, larger businesses and C-Corporations may also benefit under the right circumstances. In practice, defined benefit plans are often best suited for closely held businesses with consistent cash flow and high-income owners.
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How Defined Benefit Plans Coordinate With Other Tax Strategies
Under the Tax Cuts and Jobs Act (TCJA), defined benefit plans may be coordinated with IRC Section 199A, which allows eligible taxpayers to deduct up to 20% of Qualified Business Income (QBI).
When structured properly, this creates a layered strategy that combines:
Income deferral
Significant current-year tax deductions
Long-term retirement planning
Section 199A / QBI Deduction Explained
Key Advantages of a Defined Benefit Plan
Potentially the largest retirement-plan tax deduction available under the law
Ability to create contractually guaranteed retirement income when funded with insured products
Reduced exposure to market volatility through conservative funding strategies
Opportunity to integrate certain estate-planning techniques on a pre-tax basis
No fixed annual dollar contribution cap like defined contribution plans, subject to actuarial limits
No quarterly contribution requirements
Plan funding designed to align with guaranteed contract provisions, helping mitigate underfunding risk
Important Considerations Before Implementing a Defined Benefit Plan
Defined benefit plans are powerful—but not universal solutions.
Considerations include:
Required annual contributions for a minimum commitment period (often five years)
Less flexibility than defined contribution plans
More conservative or limited investment allocations depending on plan design
No policy loans in insured plan structures
Proper design and professional oversight are essential.
Is There Still Time to Implement a Defined Benefit Plan for 2025?
Yes—but timing matters.
Defined benefit plans require actuarial analysis, plan documentation, and proper implementation. Business owners interested in securing a 2025 tax deduction should begin planning as early as possible.
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See whether a defined benefit plan—or a fully insured 412(e)(3)-style structure—is appropriate for your business.
Dan Nuwash, MBAis the Founder and Managing Partner of Finance for Thought and can be reached throughour website.
Disclosures:
TAX- To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
TAXES- This material is for informational purposes only. Neither Finance For Thought, FFT nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.
Sources:
https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses
https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined-benefit-plan
https://www.irs.gov/retirement-plans/defined-benefit-plan
https://www.planadviser.com/412e3-plans-for-small-business-clients/
https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses