Defined Benefit
Pension Plans
The Defined Benefit Plan is an effective tool for employers who desire, and are committed to, funding a contribution in excess of the “25% of pay” limit available in defined contribution plans.
The plan works on the premise of providing a defined stream of payments for the duration of a participant’s retirement. The contributions to the plan are required to accumulate the sum of money needed to pay this stream of payments. While there are limits imposed on the lump sum benefit that one can accrue at normal retirement age, there is no annual contribution limit.
Key Plan Features and Commitments
Contribution Features
Allows for large tax deductions and rapid accumulation of assets.
Generally provides greater contributions for participants close to retirement age.
Ideal for older business owners with stable cash flows who wish to defer taxation.
Plan Sponsor Commitments
The plan is generally required to be sponsored for three to five years.
Contributions have some flexibility but are required on an annual basis.
Plan requires annual certification by an enrolled actuary (included in APC fees).
May require government Pension Benefit Guaranty Corporation (PBGC) premium payments.
Sample Plan Allocation
| Participants | Age | Compensation | Deduction | % of Contribution | Accumulation at Retirement* |
|---|---|---|---|---|---|
| Key EE | 55 | $265,000 | $192,500 | 93% | $1,834,000 |
| Employee 1 | 24 | $25,000 | $2,500 | 1% | &$23,000 |
| Employee 2 | 28 | $35,000 | $4,500 | 2% | $43,000 |
| Employee 3 | 32 | $45,000 | $8,000 | 4% | $76,000 |
| Total | $370,000 | $207,500 | $1,976,000 |
*As of Key Employees retirement date, assumed to be age 62 for this illustration.