Key Features
- Benefits determined by
age/compensation
- No maximum contribution
- Good for owner/operators
or employees with negotiated
benefits
- Favors older employees
A defined benefit pension
plan is a pension plan which
guarantees that a certain
benefit will be available upon
the retirement of a participant.
This may occur in various ways.
For example, retirement benefits
of "50% of final average
compensation", "$50 per month
for each year of service" or "2%
of average compensation for each
year of participation" are
different expressions of defined
benefit plans. The important
element here is that the benefit
is determined by the age,
compensation or employment of
the employee and not by the
amount of contributions made on
his or her behalf.
There is no maximum
contribution which may be made
to a defined benefit pension
plan, although there is a limit
to the amount of benefits which
may be provided (the lesser of
100% of final average
compensation or $13,333 per
month as adjusted for cost of
living increases). The
contributions must be determined
by an actuary as the amount
estimated to be required under
the plan, and will be
redetermined each year to
reflect the effect of current
contributions, coverage and
actuarial experience.
Defined benefit pension plans
are generally the most expensive
type of retirement benefit
available. They exist primarily
in small companies or
professional practices where the
owner(s) are also the employees
of the business, and in large
companies which have negotiated
benefits with employee
organizations.
Defined benefit plans tend to
favor older employees over
younger employees, and are
generally inappropriate where
the group of employees intended
to be benefited is below age 40.
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