Defined benefit plan

A defined benefit retirement plan provides a benefit based on a fixed formula.

Choose a defined benefit plan

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, more costly 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

Pros and cons

• 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
• Plan can be used to promote certain business strategies by offering subsidized early retirement benefits
• Most costly type of plan
• Most administratively complex plan
• An excise tax applies if the minimum contribution requirement is not satisfied
• An excise tax applies if excess contributions are made to the plan

Who contributes

Generally, the employer makes most contributions. Sometimes, employee contributions are required, or voluntary contributions may be permitted.

Contribution and benefit limits

Benefits provided under the plan are limited. Deduction limit is any amount up to the plan’s unfunded current liability (see an enrolled actuary for further details).

Filing requirements

Annual filing of Form 5500 is required. An enrolled actuary must sign the Schedule B of Form 5500.

Participant loans

A defined benefit plan may permit participant loans.

In-service withdrawals

Generally, a defined benefit plan may not make in-service distributions to a participant before age 59 1/2.

Hybrid plans

• Hybrid plans phone forum (November 23, 2010) (transcript PDF ) - new hybrid plan regulations (handout PDF )
• Hybrid plan interest crediting rules - Certain effective dates postponed (October 12, 2011)

Cash balance plans

• FAQs about cash balance pension plans (U.S. Department of Labor)

Funding

• MAP-21: Changes to Segment Rates phone forum (September 27, 2012) - (handout PDF )
• Extension of amortization periods for multiemployer plans (December 17, 2010)

Funding-based benefit restrictions

• Funding-based benefit restrictions - (February 23, 2012) (transcript PDF ) (handout PDF )
• Sample plan amendment on benefit limits for underfunded plans (December 20, 2011)

Zone certification for multiemployer plans

• Expanded annual actuarial certifications for multiemployer plans due March 31 for calendar year plans
• Multiemployer funding issues (Spring 2010) PDF

Frozen plans

• Closed defined benefit plans guidance (December 19, 2013)
• Updating frozen defined benefit plans for current law and other compliance issues (September 13, 2013)
• Is a frozen defined benefit plan subject to the top-heavy minimum benefit rules? (June 24, 2013)

Related

• Annuities - A brief description
• What is an actuary? - A brief overview
• Retirement plan reporting and disclosure
• Unreasonable assumptions in actuarial certifications may have consequences (March 19, 2014)
• Single employer defined benefit plans - Changing plan years (September 27, 2013)
• Defined benefit plan update phone forum (April 23, 2013) - (transcript PDF ) (handout PDF )