Defined Benefit Plan

 

A defined benefit plan allows the Employer to contribute as much money as is necessary to provide an employee with the retirement benefit specified by the plan. The Employer contributes an actuarially determined amount sufficient to pay each participant a fixed or defined benefit at his or her retirement. Each year the actuary recalculates the amount that must be contributed. If the actual earnings of the plan exceed the actuarial assumption, then the amount the company must contribute is decreased. If the earnings fall short, then the company must contribute more in order to make up the difference. The maximum annual benefit for 2021 is $230,000.

 

Advantages

Retirement benefit amount is fixed.

Earnings are tax-deferred.

Favors long-term, higher paid employees.

Superior investment performance may reduce future employer contribution requirements.

Potentially larger employer contributions than under a defined contribution plan, particularly for participants nearing retirement age.


Disadvantages 

Quarterly contributions are required if the plan had an unfunded current liability in the preceding year.

Pension Benefit Guaranty Corporation premium payments apply.

Complex administration requirements, including annual actuarial valuations. May be more costly to administer because of actuarial fees and the expense of premium payments if the plan is covered by the PBGC.

Inflexible funding requirements. (In special situations, a DB plan may be designed to be produce contributions that will fluctuate as the participant's compensation increases or decreases.)