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Defined Benefit Plans
A defined benefit plan is designed to provide a specific benefit amount at retirement. With this traditional pension plan, the business bears the risk of providing the promised level of retirement benefits to participant employees. The benefit amount is generally a predefined annual retirement income for employees.
Contributions to a defined benefit plan are based on what is necessary to provide benefits to plan participants. Actuarial assumptions and computations are required to determine annual contributions, and continued actuarial help is generally required to maintain a defined benefit plan. The contributions required for older employees who are closer to retirement are generally higher than for younger employees who are further from retirement.
The maximum annual retirement income for 2008 is generally the
lesser of 100% of average pay for the employee’s 3 highest
consecutive years or $185,000. Annual contributions for an employee
can greatly exceed the $46,000 maximum found under other plan
designs.
Which businesses should consider a defined benefit plan?
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Businesses that would like to contribute as much as possible to their retirement plan
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Businesses that can commit to an annual contribution
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Businesses whose key employees are nearing retirement
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