Target Benefit Plan

 

The target benefit plan has elements of both the defined benefit and defined contribution plans. The contributions are determined as if the plan were a defined benefit plan. The defined contribution plan's annual contribution percentage and dollar amount limitations apply to the contributions.

 

Unlike a defined benefit plan where the annual contribution is recalculated every year to compensate for the difference between the actual and the assumed earnings in the plan, the annual contribution to a target benefit plan is determined and set the year the plan is established. The value at retirement is merely a target and the actual future value will depend on the amount contributed, the earnings of the plan and the number of years until the employee retires.

 

Defined contribution limits, lesser of 100% of pay or $58,000 (2021 - indexed) apply to target plans.

Target benefit plans have limited applications after 2002. Profit sharing plans now have the same deductible limits for businesses with greater flexibility. A Profit sharing plan with an age weighted allocation formula will have the same effect as a target plan (i.e. favor older employees), but will be far less complex and contributions are flexible. An age weighted plan will be easier for employees to understand and will have substantially lower administrative costs.

 

Disadvantages

Like a money purchase plan, the contribution formula is written into the plan document and must be adhered to . There is no flexibility with Target benefit plans.