There are two general categories of retirement plans — defined benefit plans and defined contribution plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify annual amount of contributions to be made by the employer toward an employee’s retirement account.
- Substantial benefits can be provided and accrued within a short time – even with early retirement
- Employers can contribute (and deduct) more than under other retirement plans
- Plan provides a predictable benefit
- Vesting can follow a variety of schedules from immediate to spread out over seven years
- Benefits are not dependent on asset returns
- Most expensive form of plan
- Most administratively complex plan
- In most all years, a contribution must be made
- Employee benefits cannot be retroactively reduced
Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, cost more to establish and maintain than other types of plans.
If you establish a defined benefit plan, you:
- Can have other retirement plans
- Can be a business of any size
- Need to annually file a Form 5500 with a Schedule SB
- Have an enrolled actuary determine the funding levels and sign the Schedule SB
- Can’t retroactively decrease benefits
- Must create a governing plan document
Generally, the employer makes most contributions. Sometimes, employee voluntary contributions may be permitted.
Contribution and benefit limits
Benefits provided under the plan are limited. Generally, the benefit limits are higher than those allowed in Defined Contribution Plans. An Enrolled Actuary is needed to determine the Contribution and Benefit Limits
Annual filing of Form 5500 is required. An enrolled actuary must sign the Schedule SB of Form 5500.
Generally, a defined benefit plan may not make in-service distributions to a participant before age 62.