Defined Benefit Pension
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.
Employee eligibility requirements for a defined benefit plan are the same as those
for defined contribution plans.
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).
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.
our Qualified Plan Comparison chart (.PDF format) to compare this product to other
Qualified Retirement Plan options.
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