Fixed benefits for employees
A defined benefit plan provides a fixed, pre-established retirement benefit for employees. It is an employer-funded retirement plan, although employee contributions can be required. Defined benefit plans work by first defining the amount of the retirement benefit. An actuary calculates the targeted benefit for each plan participant and then determines the required annual contribution. The contribution is based on a participant’s age, compensation and the plan’s current trust balance.
Defined benefit plans are often used to maximize contributions and benefits for business owners who are age 50 or older. When you start a defined benefit plan, you make a commitment to contribute the annual required contribution. This amount may vary, particularly if your investments have had large gains or losses. If your investments have grown considerably, your annual contribution is likely to decrease. If your investment balances have decreased, your contribution will increase to make up the short fall. With defined benefit plans, there are various limits that need to be monitored. While these limits are independent, each can affect the others. An excise tax will apply if the minimum contribution is not made, or if excess contributions are made. For the small plan market, Defined Benefit plans work well for single employee organizations.
For additional information about Defined Benefit plans, contact us!