Defined Benefit Plans define the dollar amount of employees’ retirement benefit in the plan provisions. The Employer has a minimum funding requirement, regardless of profitability. This amount is calculated each year by an Actuary to assure adequate funds to meet the benefit defined in the Plan Document. Defined Benefit Plans allow for the largest tax-deductible contribution of any other retirement plan. This feature makes Defined Benefit Plans most appealing to small business owners with stable profits who are seeking both a tax shelter as well as retirement savings.
Highlights of Defined Benefit Plans:
- Requires annual funding.
- Retirement amounts are determined based on compensation and age of participants.
- Benefits received at retirement are limited to $210,000 per year (indexed). This increases with the cost of living.
- Excess earnings and forfeitures benefit the Employer.
Cash Balance Plans are a simplified version of a Defined Benefit Plan, in which each participant has an account balance, instead of an annuity benefit.