Personal Defined Benefit Plan: Your Top Questions Answered

Have questions about our Personal Defined Benefit Plan? Here are responses to some common questions.

Qualifications

The type of retirement plan your business should sponsor depends on a number of factors, including how many persons you employ in addition to yourself, your income level, your age, and when you’d like to retire.

Do I have the steady annual income needed to cover required annual defined benefit plan contributions?
Must I have a net income of $250,000 or more per year?
What qualifies as compensation for the purposes of a defined benefit plan calculation?
Must I be 50 years or older at the time the plan starts?
Must I be under age 65 at the time the defined benefit plan starts?
Do I need to run the defined benefit plan for a minimum number of years?
Do I need to cover all of my employees?
What if I own other businesses or my spouse owns a business?
What if I have sponsored a defined benefit plan in the past?

Contributions

When your plan is set up, your expected annual contribution level will be based on your desired level of annual savings until retirement and must conform to IRS rules. To properly design the plan, you must choose an anticipated retirement age and also provide an estimate of future pay for yourself and your employees. This information is required because the IRS limits for each participant’s benefits are adjusted for age at retirement, the number of years participating in the plan, and pay earned while participating in the plan. Schwab uses this information to design a customized benefit formula for the plan.

How do I choose my anticipated retirement age?
Is there a specific dollar contribution limit each year?
How much do I need to contribute for my employees?
What is the due date for my contribution?
When will I know my contribution amount for a particular plan year?
Can the contribution fluctuate each year?
What if my income decreases and I can’t make future required contributions?
Is there a deadline for amending the plan to increase contribution levels for the current plan year?
Why is a benefit formula needed if I’m just going to take a lump sum at retirement?
May I make my defined benefit plan contributions from a source other than the business income of the entity sponsoring the plan?
What if I already made employer contributions to my defined contribution plan this year?
What if I already made employee deferrals (e.g., 401(k) deferrals) to my defined contribution plan this year?

Unexpected Events

The IRS requires that a defined benefit plan be used as a tool to provide for retirement income and not solely as a tax shelter. Under normal circumstances, you would maintain the defined benefit plan as long as you run your company and are able to make required contributions to the plan.

What if I retire earlier than my anticipated retirement age?
Can I terminate a defined benefit plan whenever I want?
Are there any penalties for terminating a defined benefit plan earlier than expected?
When I wish to retire and terminate the defined benefit plan, what will happen if I have more assets in the plan than are needed to pay benefits?
If I decide to continue working past my original anticipated retirement age, how are my contributions affected?
What if I am self-employed and become an employee of another entity?
What happens to the defined benefit plan’s assets in the event of my death?

Assets

If I start a defined benefit plan, do I have to roll over the assets in my current retirement plan(s) sponsored by my business?
Are the contributions held in a designated account for each employee?
How do I invest assets for my account?
Who "owns" the money in the plan?
What happens if my asset returns are more or less than the assumed long-term asset return used to calculate contributions (generally around 6%)?

Plans Sponsored by a Partnership

Can the partners maintain separate accounts for their defined benefit plan contributions?
Can my partner opt out of a defined benefit plan?

Distributions

When can I take distributions from the plan?
What are the options for taking benefits from the plan?
When must I start withdrawing benefits from the plan?
May I take hardship withdrawals from my plan?
May I take loans from my plan?

Fees and Services

Are the annual fees for administration of the defined benefit plan tax-deductible?
May I pay fees from my defined benefit plan's asset account?
Are there fees for terminating the plan?
What is involved in a plan termination?
If I have an existing defined benefit plan, can I transition all services to Schwab?
I already have a plan held through a third-party administrator (TPA). I would like to keep services at that TPA, but I am looking for a place to custody the assets. What solutions are available to me?
Does my plan need to be administered on a calendar-year basis to be eligible?

Statutory Requirements

Does this plan require state approval?
Does Schwab provide the annual IRS Form 5500?
Do the IRS limits on benefits ever change?
Will this plan be exempt from creditors?
Will I need to pay Pension Benefit Guaranty Corporation (PBGC) premiums?
Do I need to insure my defined benefit plan with fiduciary insurance or be bonded in some way?