Defined Benefit Plan
A defined Benefit plan is a qualified employer-sponsored retirement plan that guarantees a specific benefit level at retirement. Because a defined benefit pension plan allows the highest potential contribution of any plan, it can create a substantial retirement fund in a relatively short period of time. This type of plan is the most advantages for an employer who wants to maximize tax-deferred retirement benefits for its older, long term employees and can afford to make large ongoing contributions.
Virtually any employer can set up a defined benefit plan. However, it is perhaps most suitable for businesses or professional practices that have a small group of highly compensated owners (employees) and very few rank and file employees.
There are strengths and trade-offs for establishing a defined benefit plan,
- With less time until retirement, older participants in a defined benefit plan are allowed by law to have greater contributions made by their employers on their behalf.
- The plan provides a guaranteed pension benefit
- Your contributions are tax deductible by the business
- Your contributions are tax deferred for employees of the business
- The plan may be “integrated “with Social Security benefits
- You must make payments to the plan regardless of how your business is performing
- You must hire an actuary to determine how much you must contribute to the plan
- You may have to pay for pension insurance
- Plan benefits are not portable
- The plan is subject to “top-heavy” legal requirements
- The plan is not allowed to discriminate in favor of highly compensated employees
- The plan is subject to ERISA rules
A number of rules govern defined benefit plans. Consequently, you will need a retirement plan specialist to help you develop and maintain a plan.