What is a defined benefit plan?
Defined benefit plans provide eligible employees a set monthly benefit upon retirement. That amount is based on factors such as age, earnings and years with the company, rather than on the performance of fund investments. Employers are required to make sufficient annual contributions to ensure that the plan will contain sufficient assets to pay the promised retirement benefits to employees when they retire. The legal benefit limit is the lesser of 100% of each participant’s average compensation, or $170,000. Defined benefit plans generally reward long-service employees and can be designed to protect benefits from the effects of inflation. Since the benefit value reaches its highest level as employees approach retirement, the plan minimizes payouts to workers who leave the company early. Because defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency, employees can have a high degree of confidence that they’ll receive their accrued pension
A defined benefit plan is any retirement plan that is not a defined contribution plan. Under a defined benefit plan, retirement benefits must be definitely determinable, e.g., a proposed monthly pension for life equal to 30% of monthly compensation. A plan formula is geared to retirement benefits; the annual contribution is usually actuarially determined; certain benefits may be insured by the Pension Benefit Guaranty Corporation; early termination of the plan is subject to special rules; and forfeitures reduce the employer’s cost of providing retirement benefits.
