Defined Benefit Pension Plans
Defined benefit plans stipulate the monthly payments that employees will receive upon attaining the plan’s retirement age.
The Internal Revenue Code and IRS regulations set a maximum monthly benefit payable for retirement ages between 62 and 65 (the “dollar limit”). For retirement before age 62, the dollar limit is actuarially decreased, and for retirement ages over 65 it is actuarially increased. At least 10 years of plan participation are required for the full dollar limit (e.g. an employee retiring with 5 years of plan participation cannot receive more than one-half of the dollar limit as a monthly benefit). The dollar limit is indexed to inflation.
Additionally, the Code and regulations set a “percentage limit”. Employees cannot receive a monthly pension in excess of 100% of average monthly compensation, pro-rated for less than 10 years of service upon retirement (e.g. an employee retiring with 7 years of service with the employer cannot receive more than 70% of average compensation as a monthly benefit).
Defined benefit plans are geared toward employers who are willing to commit to required minimum funding for at least five years. You, as plan sponsor, assume the risk of investment gains and losses (gains generally reduce your funding obligations, while losses generally increase finding requirements). Depending on employee demographics, defined benefit plans can generate larger retirement accumulations and deductible employer contributions than Defined Contribution plans. Your QBI consultant will design and maintain your defined benefit plan to meet your retirement and deduction goals. Some flexibility is available to you as long as amendment deadlines are met. QBI’s actuaries will certify minimum and maximum funding requirements each year.
In a traditional Defined Benefit Pension Plan, monthly pension payments are usually defined as a percentage of the participant’s average monthly compensation and, due to IRS non-discrimination rules, are generally pro-rated for less than 25 years of participation upon retirement.
Example: DB plan provides for a monthly pension equal to 125% of Average Monthly Compensation, reduced 1/25 for each year of plan participation less than 25 at retirement. An employee who retires after 16 years of plan participation would receive a monthly pension equal to 80% of his or her Average Monthly Compensation (125% X 16/25). This benefit may be limited to the lesser of the “dollar limit” or “percentage limit” as discussed above.
Other benefit designs are available to plan sponsors within IRS guidelines, such as cash balance plans. QBI can custom-design a benefit structure to meet your unique business objectives.
Benefits can be subject to a vesting schedule (generally not more than six or seven years or service for full vesting). The “forfeited” benefits of partially-vested terminated participants can reduce the plan sponsor’s funding obligations.
© 2010 Qualified Benefits - All Rights Reserved | 21021 Ventura Blvd., Suite 100, Woodland Hills, CA 91364 | 818-594-4900