How do I start a plan?

Setting up a plan takes a census, a design, signed documents and a first deposit. The Department of Labor’s fact sheet describes the design at the center: each participant’s account is credited each year with a pay credit and an interest credit. An enrolled actuary proposes those credits from your census, and the signed plan document fixes them.

A cash balance plan is a kind of defined benefit plan, so the rules in this answer apply to it.

1. Send a census of everyone who works in the business, owners included.
2. Review a proposal from an enrolled actuary: each person’s credit, the staff share, and the least and the most the business could put in for the year.
3. Choose a design and sign the written plan document.
4. Sign the trust agreement, or the application for insurance contracts if the plan is funded that way.
5. Open the plan’s account in the plan’s name, at a custodian or with the insurance company.
6. Make the first deposit. Contributions are paid to the plan’s trust account at a custodian, or to the insurance company as premium.
7. Run the yearly cycle: the actuary’s valuation, the deposit by its due date, Form 5500 with Schedule SB, and the notices to staff.

An employer may adopt a plan after its tax year ends and treat it as adopted on the last day of that year, if it adopts the plan by the return’s due date including extensions. Providers that require signing before the year ends are stating their own product rule.

Every date that applies: When is the deadline to start?

A proposal needs a census and a few facts about the business. For each person, owners included: name, job title, date of birth, hours worked last year, hire date, wages last year, ownership percentage, and whether the person is family of an owner. For the business: its type, its current plans and their contributions, and the deduction you want.

Remove Social Security numbers, bank or card account numbers, driver license numbers and medical information before uploading your census through the Defined Benefits client portal.

Prepare your census and continue to the client portal.

The employer signs the plan document as the plan’s sponsor. The trustee, often the owner, signs the trust agreement. The employer also signs a services agreement with the firm that administers the plan, and either a custodial agreement for the plan’s account or the application for its insurance contracts.

Your plan’s custodial agreement and advisory agreement state exactly who may give instructions on the account; ask for both before you sign. A plan that covers only owners is outside Title I of ERISA, and its trust requirement comes from section 401(a) of the tax code instead.

Where the money sits and who controls it: Who holds my money?

An enrolled actuary, licensed by the federal Joint Board for the Enrollment of Actuaries, values the plan each year, certifies the minimum and maximum contribution, and signs Schedule SB of the plan’s Form 5500. The deduction limit for a defined benefit plan must be figured by an actuary. A third-party administrator, or TPA, runs the plan between valuations.

The IRS tells every sponsor to “Have an enrolled actuary determine the funding levels and sign the Schedule SB.” The TPA keeps the plan document current, runs the coverage and nondiscrimination tests, prepares Form 5500 and the participant notices, and processes payouts. One firm may do both jobs.

The enrolled actuary who signs for plans introduced through this site is [Enrolled actuary’s name], enrollment number [enrollment number].

Ask any provider for the enrolled actuary’s name and enrollment number, a written fee schedule that lists every service, the name of whoever signs Form 5500 and runs the staff tests, and an illustration that prints every assumption. Then send the same census to more than one provider and compare what comes back.

The Joint Board for the Enrollment of Actuaries enrolls the actuaries who may sign Schedule SB, and the IRS hosts its pages, including how to contact the Joint Board. Published fees are each seller’s own figure on the date shown. Get every fee in writing before you sign.

Every fee a plan pays: What does a plan cost?

Before you sign, get every figure and every duty in writing: the owner’s credit, the staff’s credits and the rule that sets the staff share, the least the business must put in and the most it may deduct, every fee including amendment and termination, the actuary’s name, and who files each yearly form.

• What is the least the business must put in each year, and what moves that minimum?
• How much of each contribution goes to staff, and which test sets that share?
• Where does the money sit, in whose name, and who may give instructions on the account?
• What does every service cost each year, and what does it cost to amend or end the plan?
• Who signs Schedule SB, and who files Form 5500?
• Which pre-approved plan document does the plan use?
• What happens to the minimum contribution in a year when profit falls?

The IRS lists the defined benefit plan as the “Most costly type of plan” and the “Most administratively complex plan.” A plan is a yearly commitment, so read the risks before the signature page.

The risks, in order: What are the risks?

The staff tests: What do my employees get?

The owner’s yearly part is fixed: send the census and pay data, approve the contribution within the actuary’s range, make the deposit by its due date, sign Form 5500, and pass the required notices to staff. The provider does the rest. The IRS calls this the “Most administratively complex plan.”

The minimum contribution is due eight and a half months after the plan year ends. Form 5500 is due by the last day of the 7th calendar month after the plan year ends, and Form 5558 gives a one-time extension of up to 2½ months.

Yes. Most small plans use a plan document that the IRS has reviewed and issued an opinion letter on, called a pre-approved document. The opinion letter covers the wording of the document. The letter does not approve your plan’s design, your deduction or your tax result.

Ask which pre-approved document the plan uses, and keep a signed copy with the trust agreement. The design inside the document, and every figure that comes from it, is still the actuary’s work on your census.

A defined benefit plan needs an enrolled actuary, a yearly valuation, testing on every census and a buyer who can fund it every year, so the work is specialized and the pool of businesses that fit is small. The Department of Labor counted 46,233 defined benefit plans in its 2023 Form 5500 data, out of 836,843 private pension plans.

The Department’s counts leave out one-participant plans.

The questions to take to your CPA: What should I ask my CPA?