Choosing a Retirement Plan: Defined Benefit Plan
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.
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.
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 prior to Age 62.
Employee Plans News - Spring 2010 - Multiemployer Funding Issues
Retirement News for Employers - Summer 2010 - What is an Actuary? - A Brief Overview
Retirement News for Employers - Summer 2010 - New Relief for Single-Employer and Multiemployer Defined Benefit Plans
Employee Plans News - November 26, 2010 - Funding Relief for Multiemployer Defined Benefit Plans
Employee Plans News - December 17, 2010 - Extension of Amortization Periods for Multiemployer Plans
Retirement News for Employers - Fall 2010 Edition - Annuities - A Brief Description
Employee Plans News - October 12, 2011 - Hybrid Plan Interest Crediting Rules - Certain Effective Dates Postponed
Employee Plans News - December 20, 2011 - Sample Plan Amendment on Benefit Limits for Underfunded Plans