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Defined Benefit Plans

What is a Defined Benefit Plan?

A Defined Benefit plan is an Employer funded retirement plan. Defined benefit plans work by first defining a target retirement benefit. The actuary determines the amount needed at retirement to provide the targeted benefit; and then determines the annual contribution based on the current age(s) of the participant(s) and the plan’s current trust balance. Since the amount of the contribution required to fund the target benefit increases with age, defined benefit plans are appropriate for owners who are age 45 or older.

Plan assets are trustee directed in pooled accounts. Defined benefit plans are often used when there are few or no other employees and the principals or owners of the company are older and want to catch up by making large contributions in a short period of time.

When you start a defined benefit plan, you make a commitment to contribute the annual required contribution. This amount may vary, particularly if your investments have had large gains or losses. If your investments have grown considerably, the amount of your annual contribution is likely to decrease. If your investment balances have decreased, your contribution will be increased to make up the short fall.

There are various limits that need to be monitored for defined benefit retirement plans. While these limits are independent, each has an affect on the others.

• Maximum Contribution: Actuarially determined can be $100,000 or more and often exceeds 25% of covered payroll.
• Compensation Limit: $245,000
• Annual Benefit Limit: $195,000 (maximum benefit an individual can receive each year at retirement).

Defined Benefit Plans Combined with Defined Contribution Plans

Combining a defined benefit plan with a defined contribution plan extends the reach of defined benefit plans from companies that have few employees to companies with work forces up to 30 or 40 employees. As long as you cover at least 40% of your work force in the defined benefit plan, you may cover the remaining employees with some other type of plan – usually a profit sharing plan. Combining a defined benefit plan with a defined contribution plan solves a number of problems when designing defined benefit plans for older owners desiring to make substantial retirement plan contributions while controlling employee costs. Provisions may also be made to accommodate different levels of contributions for different owners or partners.

Contact Retirement Plan Services

Not sure which retirement plan is the best option for your situation? If so, then contact our retirement plan professionals to determine the best plan options for you. For additional information on our retirement plan services please contact Steve Shearn at 831-759-6300, or click here to email Steve. .