We Read 18,461 Small-Business Pension Filings. Here Is The Tax Waiting On The Way Out.

The Short AnswerIn 2024 federal filings, 18,453 businesses with 25 or fewer plan participants reported pension plans costing at least $100,000 a year. The median business reports $2,491,322 across all its plans. In a hypothetical married-filing-jointly illustration using fixed tax schedules and stated income assumptions, federal tax on that amount ranges from $211,759 to $858,568 and California tax reaches $281,501.

What We Read

Every year, each retirement plan in the country files a Form 5500 with the federal government, and the Department of Labor publishes all of them as free public data. Single-employer defined benefit plans, cash balance plans included, attach a Schedule SB: the actuary’s report of what the plan holds and what it owes.

We took every Schedule SB filed for the 2024 plan year, the most recent complete year, and kept the plans that look like a business owner’s plan:

• 25 or fewer participants. The median plan has 7.
• A target normal cost of at least $100,000. That is the yearly cost of the benefits the plan’s members earn, the actuary’s measure of the cost of the benefits members earn during the year.
• One record per plan, matched on employer ID and plan number, so amended and duplicate filings count once.

That leaves 18,461 plans run by 18,453 businesses in 54 states and territories. Every figure about the plans below comes straight from what these businesses reported. The tax figures are illustrations built on those numbers, and the method is at the end.

Who Runs These Plans?

Healthcare and professional firms, mostly. By the industry code on the filing, healthcare businesses run 6,475 of the plans, and professional services firms (law, accounting, engineering and consulting) run 4,164. Together that is 57.6% of the list. Finance and insurance firms follow with 1,478, then construction with 1,331.

California has more of these plans than any other state: 4,862, ahead of New York (1,998), Florida (1,356), Texas (948) and New Jersey (899). The California businesses alone hold $15.6 billion across their retirement plans.

How Much Money Is Sitting In These Plans?

The defined benefit plans by themselves hold $27.0 billion, a median of $1,045,664 per plan, and report $4.86 billion a year in benefit costs, a median of $209,711.

The pension is usually only part of the pile. 16,845 of these businesses, 91.3%, also file for at least one other retirement plan under the same employer ID. Counting every plan each business files for, the total is at least $63.3 billion.

The IRS says: “If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable unless the payment is a qualified distribution from a designated Roth account.” For pre-tax money, the deduction on the way in is real, and later payments may be taxable. The illustrations below treat the whole withdrawal as taxable.

Older Plans, Bigger Balances

Every filing carries the date the plan started, and the median balance climbs with every five years the plan has run.

Just over half of these plans, 9,491, started in the last five years.

What Will The Owners Owe On The Way Out?

The timing of withdrawals can change the bill a great deal. For a hypothetical illustration, we applied four withdrawal patterns to $2,491,322, the median total across an employer’s plans. The filings do not show the owner’s share.

One in four of these businesses holds $4,304,786 or more. At that balance the same four exits put the federal bill anywhere from $593,853 to $1,519,196.

The heirs row carries the biggest assumption: that the children have no income of their own. Heirs who are a married couple already earning $400,000 would owe about $800,000 in federal tax on the same inheritance, nearly as much as the most expensive row.

CalculatorRun your own plan balance through the four exits→

What Happens To A Plan With Money Left Over?

5,442 of the plans, 29.5%, report assets of at least 125% of their funding target, the actuary’s measure of what the plan owes for benefits earned so far. For those businesses, the rules for leftover money matter.

When a plan ends with more than it needs and the surplus goes back to the business, Federal law taxes a surplus that goes back to the business at 50%, or 20% when the statute’s qualified replacement plan or benefit-increase requirements are met. Funding on paper and the cost of closing a plan are measured differently, so a large cushion today can still shrink at the finish. That is a question for the plan’s actuary, years before the plan ends.

Four Things That Can Affect The Size Of The Bill

1. The years it is spread over. In this fixed illustration with no other income, the 20-year federal total is $160,838 lower than the 10-year total.
2. What else you earn in those years. Withdrawals stack on top of salary, business income and Social Security, so other income can cause part of a withdrawal to be taxed at higher marginal rates.
3. Where you live when it comes out. California adds its own tax, up to 13.3% on the top dollars.
4. Who takes it out. Adult children who inherit a retirement account generally must empty it by the end of the 10th year after the owner’s death, which can land in their own peak earning years.

These are timing questions for your CPA and the plan’s actuary, and they are worth raising years before the first dollar comes out.

How We Did This

• Source. U.S. Department of Labor Form 5500 datasets for the 2024 plan year: Schedule SB, Form 5500-SF and Form 5500. Filings arrive one to two years after the year they report, so 2024 is the most current complete year.
• Filter. A Schedule SB on file, 1 to 25 participants, and a target normal cost of at least $100,000. One record per employer ID and plan number.
• Plan figures. Pension assets are the current value of assets on the Schedule SB valuation date. Benefit costs are the target normal cost.
• Business totals. End-of-year assets from the short-form filings for the pension and every other plan under the same employer ID, or the Schedule SB figure when the pension has no short-form line. Sibling plans that file the full Form 5500 add a plan but no dollars here, so these totals are a floor.
• Whose money it is. A plan’s assets belong to all its participants. The filings show the plan’s total, without the owner’s share.
• Tax figures. Computed with the same engine as this site’s calculators, using the assumptions under the table. They are illustrations, not projections for any business.

This article is general education about how retirement plan money is taxed, and nothing in it is tax, legal or investment advice for your situation. Your CPA and the plan’s actuary hold the numbers that decide your own bill.

About The Author

Tyler Ostrovsky founded 19th Hole Financial after eight years as a professional golfer, including status on PGA Tour Canada. He builds tax strategy and advanced life insurance plans for high earners and works alongside their CPAs and attorneys.