Choosing a Retirement Plan: Defined Benefit Plan
Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.
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
- Can’t retroactively decrease benefits
Pros and cons
- Substantial benefits can be provided and accrued within a short time – even with early retirement
- Employers can contribute (and deduct) more than under other retirement plans
- Plan provides a predictable benefit
- Vesting can follow a variety of schedules from immediate to spread out over seven years
- Benefits are not dependent on asset returns
- 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
- An excise tax applies if excess contributions are made to the plan
Generally, the employer makes contributions. Sometimes, employee contributions are either required or voluntary.
Deduction limit is any amount up to the plan’s unfunded current liability (see an enrolled actuary for further details).
Annual filing of Form 5500 is required. An enrolled actuary must sign the Schedule B of Form 5500.
A defined benefit plan may permit participant loans.
Not permitted prior to age 62.
- FAQs about Cash Balance Pension Plans (U.S. Department of Labor)
- Unreasonable Assumptions in Actuarial Certifications May Have Consequences (March 19, 2014)
- Deadline Extended For Pre-Approved Defined Benefit Plans (January 23, 2014)
- Closed Defined Benefit Plans Guidance (December 19, 2013)
- Single Employer Defined Benefit Plans - Changing Plan Years (September 27, 2013)
- Updating Frozen Defined Benefit Plans for Current Law and Other Compliance Issues (September 13, 2013)
- Is a Frozen Defined Benefit Plan Subject to the Top-Heavy Minimum Benefit Rules? (June 24, 2013)
- Defined Benefit Plan Update phone forum (April 23, 2013) - (transcript) (handout)
- MAP-21: Changes to Segment Rates phone forum (September 27, 2012) - (audio) (handout)
- Lifetime Annuity Guidance phone forum (August 28, 2012) - (Audio and Transcript) (handout)
- Funding-Based Benefit Restrictions - (February 23, 2012) (transcript) (handout)
- Sample Plan Amendment on Benefit Limits for Underfunded Plans (December 20, 2011)
- Hybrid Plan Interest Crediting Rules - Certain Effective Dates Postponed (October 12, 2011)
- Annuities - A Brief Description (Fall 2010 Edition)
- Extension of Amortization Periods for Multiemployer Plans (December 17, 2010)
- Hybrid Plans phone forum (November 23, 2010) (transcript) - new hybrid plan regulations (handout)
- Funding Relief for Multiemployer Defined Benefit Plans (November 26, 2010)
- New Relief for Single-Employer and Multiemployer Defined Benefit Plans (Summer 2010)
- What is an Actuary? - A Brief Overview (Summer 2010)
- Multiemployer Funding Issues (Spring 2010)