A defined benefit pension plan is designed to provide a specific benefit amount at retirement. This is the traditional pension plan in which the employer bears the risk of providing the promised level of retirement benefits to participants.

Eligibility

Employee eligibility requirements for a defined benefit plan are the same as those for defined contribution plans.

Contributions

Unlike defined contribution plans, the defined benefit plan limit is based on the benefit to be received at retirement, not on the annual contribution. Each year the plan's actuary determines the required annual contribution based on several factors such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit for which a plan may fund is the lesser of 100% of the participant's compensation up to $160,000 (indexed for 2002).

Advantages

For participants closer to retirement, contributions to a defined benefit plan may exceed the 100% or $40,000 limit imposed by defined contribution plans. This may be advantageous to a business owner who is approaching retirement age, and has not ever started a retirement plan and wishes to put away money as fast as possible. A defined benefit plan can also be advantageous for an employer wanting to provide a fixed benefit or to favor older employees.

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