The main difference between the two plan types is that contributions to a Defined Benefit (DB) Plan are non-discretionary. A DB Plan’s annual employer contribution is determined on an actuarial basis and dependent on factors such as changes in employee census and investment performance. Although the fixed nature of the contribution may be less predictable in the case of a DB Plan, in many cases, the ability to contribute more to a DB Plan versus a DC Plan may make it a viable option for your business. DB plans can be an excellent tool for accumulating retirement income into a tax-deferred qualified plan. Since DB plan contributions are based on the present value of a benefit payable at retirement, the older the Participant, the less time there is to accumulate income and the greater the required contribution can be.
By adopting a DB plan, you are able to increase contributions and tax-deductions, but you are also making a commitment to fund to a specified benefit level. Changes to the plan can be made, if necessary, but the contribution cannot be discretionary, like a profit sharing plan. Changes can be made for legitimate business reasons, but funding levels cannot be adjusted to reflect higher or lower profits each year.