WHAT IS THE DIFFERENCE BETWEEN A DEFINED BENEFIT AND A DEFINED CONTRIBUTION PLAN?
Both are qualified retirement plans and contributions to these plans receive a current tax deduction. In a defined benefit plan, risk is borne by the employer to provide for a certain future benefit at the employee’s retirement. The benefit is based on a formula selected by the employer which takes into account the employee’s income level and number of years of employment with the employer. It is the employer’s responsibility to make sure that the funding is adequate to reach the pre-determined benefit amount. A defined contribution plan is a plan such as a profit sharing plan or a 401(k) plan where the benefit level is dependent on contributions and investment returns. In this type of plan, the employee bears the risk on the ultimate amount of their benefit. There is no guarantee of the future value at retirement; it is predicated on the level of contributions and on investment returns. WHY IS A 412e3 PLAN NOT SUBJECT TO THE FUNDING REQUIREMENTS OF A TRADITIONAL DEFINED BENEFIT PLAN?
