A defined benefit plan is a type of pension plan for your employees, where you as the employer (sponsor) commit to a specific payment, lump sum or a combination of these. This commitment is defined by a formula derived from employee’s earnings history, tenure and age. It is not based on individual investment returns.
Basic Properties of a Defined Benefit Plan
This type of a benefit plan is not subject to an individual allocation limit of $58K. If you have this type of a retirement plan set up in your company, then your tax deductible contributions are not limited to 25% of eligible compensation. What makes a defined benefit plan different from a profit sharing 401 (k) plan is that your employees know their retirement benefit. You select a formula and calculate the required contribution to fund the benefit to standard retirement age. With a 401 (k) plan your employees know their contributions, but their future benefit is defined by portfolio’s performance.
A defined benefit plan may also include a life insurance that would yield a pre-retirement benefit for survivors. This plan provides your employees a good flexibility in funding instruments. Risk averse individuals will appreciate the option of life insurance and annuities this type of plan offers.
Who Can Gain The Most From This Plan?
If you employ older high income individuals, then they stand to gain here. Baby boomers stand to gain a lot more than the Gen X generation. As an older individual, you have less years to achieve the standard retirement age. Therefore your annual cost for the benefit will be higher.
As mentioned above, you can include a whole life or a universal policy in this plan. These policies will have to be taken out of the plan upon retirement age, but not lost. The employee can assume this policy through a number of ways. Four to be exact. One of those is an exchange to an individual policy through a “net amount at risk exchange provision.”
How To Setup The Plan
This type of plan requires a Trust to be setup before you can contribute to it. You must define the formula before the last day of your tax year. It is then effective retroactively to the first day of that tax year. Not earlier! We can help provide assistance to you with the entire setup at a highly competitive price. Simply fill out the basic form below and let’s start a conversation. We can then have our specialists prepare a tailor made solution for you. A plan that could save you money and raise your attractiveness to employees.