Frequently Asked Questions about Defined Benefit Plans
Is my contribution mandatory?
Yes. A contribution is required each year to fund the benefit promised at retirement. This is called the ‘minimum contribution requirement’ (MCR) . However, the plan benefit formula can be amended for future years and thus increase or decrease the contribution amount. Also, aggressive funding of your plan in the first two or three years may allow you to ‘skip’ one or more years’ contributions while still satisfying the MCR, and without making other changes to your plan.
Is my annual contribution limited to a percentage of income like a SEP or Profit Sharing plan?
No. Your annual contribution is determined as a function of age, compensation, investment performance, actuarial assumptions and maximum benefit allowed. An actuary calculates the amount that you must fund each year.
When is my annual contribution due?
The deadline for pension plan contributions is no later than 8 1/2 months after the close of the plan year. For the contribution to be deductible, you must make it on or before the due date of your tax return (with extensions).
Can my contribution amount be reduced after I set up my plan?
Yes. This can happen in several ways. You can always amend your plan formula down for future years (but, depending on when you amend the plan, you may still be required to make the contribution for the current year). If your compensation decreases, your annual required contribution may decrease. If your investment performance is greater than the assumed interest rate, your contributions will also decrease.