Introduction to Personal Defined Benefit Plans

Introduction to Personal Defined Benefit Plans

The Schwab Personal Defined Benefit Plan is a retirement solution for high-earning small-business owners. This plan offers participants a specific monthly lifetime benefit amount at retirement. Contribution amounts with this plan are calculated and adjusted annually to reach the targeted goal.

This plan is best for professionals aged 50 or over who can make annual contributions of $90,000 or more for at least five years and who have few if any employees.

Clients may prefer this plan to a defined contribution plan because it allows aggressive savings in a short time frame with maximum tax deductibility.

Key information related to Personal Defined Benefit Plans:

 

Eligibility

Most appropriate for high-earning small-business owners, partners, and key employees who are in the peak of their earning years. General qualifications* for this plan include:

  • Client is in a position to commit to annual funding of $90,000 or more.
  • Client is self-employed with five or fewer employees.
  • Client is between the ages of 50 and 65 and intends to run the plan for at least five years.
  • Client understands that market fluctuations, investment performance, changes in compensation, and additional employees can affect the funding requirements.
Key features

This plan allows participants to aggressively save for retirement in a relatively short time and get the maximum tax deductibility.


Plan benefits include:
  • High contributions and large tax deduction—Contributions can be significantly higher than those of other business retirement plans.
  • Aggressive savings plans—Participants who are close to retirement can grow retirement assets quickly and get the maximum tax deductibility to catch up to their retirement needs.
  • Savings solution for high-earning business owners—Participants nearing retirement can save more than $90,000 per year in an aggressive retirement savings vehicle.
Plan features include:
  • One complimentary funding proposal, to help your client determine if a personal defined benefit plan is right for them.
  • Competitive set-up and recordkeeping fees.
  • Operational services, including annual actuarial calculations, annual IRS Form 5500 or 5500-EZ preparation, and eligible distribution calculations.
Pricing Plan fees include a set-up fee, an annual service fee, termination fees, and other fees. See details below:

Pricing details

Account set-up and service fees After the account is opened, participants receive an invoice for first-year and startup fees. Participants also receive an invoice for annual service fees at the end of every year. All plan fees are tax deductible.

Note: A $1,000 non-refundable deposit is required prior to the delivery of the plan documents. The deposit is applied against the plan set-up fee.
  One person only Key employees only* Employer with staff
  Set-up fees & Annual service fees: $2,250
$2,000
$2,250
$2,250
$2,250
$3,000 up to 3 participants
$3,500 for 4 – 5 participants
 

* A key employee must meet contribution limits.
† Staff are employees who are not key employees.

Termination fees When your client terminates the Personal Defined Benefit Plan:
  • Schwab Retirement Plan Services must prepare plan amendments, participant notices, and government filings.
  • Final benefit calculations and special actuarial calculations are also required. 
Advisor management fees Advisors can deduct their management fees from the account.
Other fees The complete Service Fee schedule is included with the complimentary defined benefit plan proposal and listed on page 2 of the Schwab Personal Defined Benefit Plan Funding Proposal Worksheet.
Deadlines The Schwab Personal Defined Benefit Plan has a December 31 year-end. To make contributions to a new plan for the current year, the following response dates are recommended:
  • Submit a completed Schwab Personal Defined Benefit Plan Funding Proposal Worksheet by November 15
  • Approve the plan proposal by December 1
  • Sign the plan documents by December 31
  • Make the first contribution by the tax-filing deadline*

*The client has until September 15, of the following year, to make the first contribution, but must submit it by the tax-filing date to deduct it in the current year.

Contributions Annual contributions are mandatory.
  • Plans are funded with employer contributions only.
  • Contribution levels are calculated based on participant ages, compensation amounts, retirement ages, and market values of assets.
  • Contributions are adjusted yearly for actual asset performance.
  • Participants can amend the plan (for an additional fee) if the contribution level needs to be changed.

    Note: It is the business owner/plan administrator's responsibility to ensure the business has the earned income to make contributions and prove the source of funds if audited by the IRS. Schwab, as the custodian of the account, is not responsible to monitor source of funds.
Tax ramifications
  • Contributions are generally 100% tax deductible within IRS limits.
  • Earnings grow tax deferred.
  • Distributions are taxable (unless rolled into an IRA or another tax-deferred plan).

For information about income limitations, withdrawal penalties, distribution requirements, and more, refer to the following table:

Income limitations Non-corporate businesses must have enough net business income to deduct contributions. In years when the contribution amount is greater than the net business income, required minimum contributions may not be fully deductible.
Lifetime benefit amount

Unlike defined contribution plans, the IRS limits the amount of annual benefit the client can target at retirement. See contribution limits table for more information.

The annual contribution needed to save for annual benefit at retirement is based on the participant's current age, average income, planned retirement age, asset levels relative to benefit liabilities and other factors.

Additional features
  • Option level 0
  • Schwab MoneyLink®  (from accounts with similar registration)
  • Power of attorney
Account administration Schwab Retirement Plan Services' (SRPS) Personal Defined Benefit Team provides recordkeeping services, including actuarial calculations, funding requirements, and annual reporting.
Roles and responsibilities

SRPS

Investment advisor

Service team

Client

Provides initial funding proposal Identifies and qualifies candidates Opens the investment account Completes the Funding Proposal Worksheet
Provides adoption agreement and plan document Acts as a liaison* between the client and SRPS Answers ongoing questions about the investment account Submits compensation data for the previous year, at the beginning of year
Performs annual recordkeeping and actuarial services Manages investments in the account   Pays all startup and yearly fees
Prepares Form 5500 yearly     Signs and mails the IRS Form 5500 to the government, yearly
Calculates yearly contributions     Makes all annual contributions no later than September 15 the following year
Answers ongoing questions about plan provisions and administration      

*You can choose to work with SRPS to help with plan setup, or you can refer the client directly to SRPS and manage investments within the account once setup is complete.

Conversions Schwab does not accept conversions of existing defined benefit plans for small businesses. For more information about plan conversions, contact Schwab Retirement Network via a Schwab Advisor Center® service request.
Distributions

Normal distributions:

  • Participants can take distributions upon retirement or termination of service.
  • Participants can choose to set up lifetime annuity payments or take a onetime lump sum payout. Lump-sum amounts are distributed in cash, or they can be rolled over into an IRA or another qualified retirement plan.

Hardship and in-service withdrawals:

  • Hardship withdrawals are not allowed.
  • In-service withdrawals are permitted after normal retirement age.
Required minimum distributions (RMDs):
  • Participants must begin taking RMDs annually, beginning the year in which the participant reaches the federal RMD age.
  • Under SECURE 2.0 if you don't take your RMD by the IRS deadline, a 25% excise tax on insufficient or late RMD withdrawals applies. If the RMD is corrected timely, the penalty can be reduced to 10%. Follow the IRS guidelines and consult your tax advisor. 
Withdrawal penalties
  • Withdrawals before age 59 1/2 are subject to a 10% penalty. Exceptions to the penalty include:*
    • Rollover of distribution to another plan or IRA
    • Termination of employment at or after age 55
    • Withdrawals made in equal installments over the participant's life or life expectancy
  • Unauthorized or premature disbursements could result in plan disqualification, federal tax penalties, or other liabilities.
  • Participants must report any ineligible withdrawals to the IRS.

*Schwab will not determine if a distribution qualifies for an exception. Clients should consult their tax advisor.

ERISA Personal Defined benefit plans are Employee Retirement Income Security Act (ERISA) accounts and are governed by ERISA guidelines and rules.
Beneficiaries The number of primary or contingent beneficiaries is unlimited. Beneficiaries have to be added by the employee.
Comparison Chart Small Business Retirement Plans: Review this comparison of the different retirement plans offered by Schwab.

Will my client receive instructions for operating the plan?
Yes. After the client returns the signed documents, the Personal Defined Benefit Team sends a welcome email containing copies of the client's signed documents, a Summary Plan Description, a Plan Administrator's Handbook, the main Plan Document, and the SRPS invoice for set-up fees.

How does my client establish an investment policy?
The investment strategy must be tailored for each separate plan based on the employer's objectives and risk tolerances. The employer should establish an Investment Policy Statement (IPS) that provides general principles of their investment strategy for their personal defined benefit plan.

Responsibility for investing assets can be allocated to the trustee, the employer, or an investment advisor. The party directing investments should accept the investment policy and agree to abide by it. The IPS is most important if either the employer allocates trading authority or their Personal Defined Benefit Plan covers employees other than themselves.

What if my client also has a defined contribution (DC) plan?
The client can maintain a DC plan, such as a 401(k), SEP-IRA (but not a SEP-IRA using IRS Form-5305-SEP), or profit-sharing plan in conjunction with their Personal Defined Benefit Plan, but they may not be able to contribute as much to the DC plan each year when funding both plans.

The following are available to assist you:

How to initiate a personal defined benefit plan
Introduction to required minimum distributions (RMDs)
Introduction to Retirement Plan Solutions
Introduction to tax reporting

Participants should consult with their tax advisor if they have any questions about tax implications.

Find forms, guidelines, and other tax information at irs.gov.

For pricing information related to this account type, see the Charles Schwab Pricing Guide.