Defined Benefit Plans
Highlights:
According to the Pension Benefit Guaranty Corporation, there are about 38,000 insured defined benefit plans today compared to a high of about 114,000 in 1985. They go on to state that this decline was due primarily to plans with 100 or fewer participants. One possible reason for this decline is the complexity and cost required by many of these plans.
Still, a defined benefit plan may be an option to consider when reviewing retirement plans. Why? Among the reasons are:
- Employers can generally contribute (and, therefore, deduct) more than to other types of plans.
- Substantial benefits can be provided – even with early retirement.
- Vesting can be immediate or spread out over a seven-year period.
- Benefits are not dependent on asset returns.
- Participant’s annual retirement benefit determined by the plan’s benefit formula
- Higher annual retirement benefits possible, up to $195,0001 per year
- Greater design flexibility
- Plan may allow loans
If you establish a defined benefit plan, you:
- Can have other retirement plans.
- Can be a business of any size.
- Need to annually file a Form 5500 with a Schedule B.
- Have an enrolled actuary determine the funding levels and sign the Schedule B.
- Benefits cannot be retroactively decreased
Pros and Cons:
- Significant benefits possible in a relatively short period of time.
- Employers can contribute (and deduct) more than under other retirement plans.
- Plan provides a predictable benefit.
- Plan can be used to promote certain business strategies by offering subsidized early retirement benefits.
- Most costly type of plan.
- Most administratively complex plan.
- An excise tax applies if the minimum contribution requirement is not satisfied.
- Actuary required to determine employer’s annual contributions
- Must meet minimum coverage tests but can exclude some employees
- Annual return required
- Annual nondiscrimination testing required
Who Contributes: Generally, employer contributions. Sometimes, employee contributions are either required or voluntary.
Contribution Limits: Deduction limit is any amount up to the plan’s unfunded current liability (see an enrolled actuary for further details).
Filing Requirements: Annual filing of Form 5500 is required. An enrolled actuary (not an enrolled agent) needs to sign the Schedule B of Form 5500.
Participant Loans: Permitted.
In-Service Withdrawals: Not permitted.
**Source: http://www.irs.gov/retirement/article/0,,id=108950,00.html
