Understanding Your Defined Benefit Plan Options: A Guide for Business Owners

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When it comes to building long-term wealth and reducing taxable income, Defined Benefit (DB) plans can be one of the most powerful retirement tools available to business owners. Unlike 401(k)s or profit sharing plans, Defined Benefit plans promise a specific benefit at retirement, giving you predictability, structure, and the ability to make very large annual contributions.

At Nydia Retirement Solutions, we’ve been guiding business owners since 1999. With our in-house actuaries and decades of experience, we help you understand not only how these plans work, but which type of DB plan structure aligns with your personal goals, your company’s finances, and your long-term vision.

Let’s walk through the three most common options available under a Defined Benefit plan.

1. Single Life Annuity

A Single Life Annuity provides fixed monthly payments to the participant for the rest of their life. Once the participant passes away, the payments stop, and no further benefits are paid to beneficiaries.

Why it might be right for you:

  • You want the highest possible monthly payout during your lifetime.
  • You do not need to provide ongoing benefits to a spouse or family member.
  • You value predictability and a guaranteed stream of income.

This option is often chosen by business owners who want to maximize their personal retirement benefit and who may have other estate or insurance plans in place for their families.

2. Joint and Survivor Annuity

A Joint and Survivor Annuity also provides fixed monthly payments, but with an important difference: when the participant passes away, payments continue to a designated beneficiary (often a spouse).

Why it might be right for you:

  • You want to ensure your spouse or dependent has ongoing financial security.
  • You’re willing to accept slightly smaller monthly payments during your lifetime in exchange for peace of mind for your family.
  • You value the security of knowing your benefits extend beyond your lifetime.

This option is especially attractive for business owners who see retirement planning as part of a broader legacy and family wealth strategy.

3. Lump Sum Payment

A Lump Sum Payment gives participants the option to receive their entire vested benefit in one payment. This offers maximum flexibility, but it also comes with more responsibility.

Why it might be right for you:

  • You prefer to manage your own retirement savings.
  • You want the flexibility to invest funds according to your own strategy.
  • You’re comfortable with the tax implications and ready to work with your CPA and financial advisor to optimize them.

This choice is often attractive to business owners who want full control over their assets and have a clear investment strategy in place.

Important Considerations for All DB Plans

While DB plans are powerful, they require structure and ongoing management. Here are key points every business owner should understand:

  • Adequate Funding: DB plans must always be funded to cover promised benefits. If contributions fall short, the IRS requires minimum funding installments. Missed contributions can trigger a 10% penalty tax and compound future obligations. Having the right actuarial assumptions and investment strategy is critical.
  • Employer Responsibility: All administrative costs, from plan amendments to annual filings, are paid by the employer. For participants, the program is free.
  • Annual Testing and Compliance: Each year, actuaries prepare a valuation report and compliance testing. This ensures that plan assets align with promised benefits, sets your funding range for the year, and confirms compliance when filed with the IRS (via Form 5500 and Schedule SB).

Why Business Owners Choose Defined Benefit Plans

Defined Benefit plans, whether set up as a Single Life Annuity, Joint and Survivor Annuity, or Lump Sum, are not for everyone. But for high-earning business owners, they are a proven way to:

  • Maximize retirement contributions well beyond 401(k) limits.
  • Significantly reduce taxable income each year.
  • Build substantial long-term wealth while offering competitive benefits to staff.

When paired with a 401(k) Profit Sharing plan, these strategies can deliver even greater flexibility and compliance advantages. [Explore our Combination Plan options ➝]

Clarity from Complexity

At Nydia Retirement Solutions, we take pride in bringing clarity to complex retirement strategies. With in-house actuaries and more than two decades of steady growth, we don’t just administer plans—we design solutions that align with your goals, protect your business, and give you confidence in the future.