PATA Pension Administration and Trust Accounting
- Employers can generally contribute (and, therefore, deduct) more than to other types of plans.
- Substantial benefits can be provided – even with early retirement.
- Vesting can be immediate or spread out over a seven-year period.
- Benefits are not dependent on asset returns.
Other things that should be know and understood when taking on a defined benefit plan are:
- A business of any size can adopt a defined benefit plan
- If a defined benefit is in place the plan sponsor can have other retirement plans at the same time
- A Form 5500 with a Schedule SB must be filed annually
- An enrolled actuary must be employed to determine the funding levels and sign the Schedule SB.
- Benefits cannot be retroactively decreased
- The plan sponsor can accumulate significant benefits in a relatively short period of time.
- Employers can contribute (and deduct) more with a defined benefit plan than other retirement plans.
- Plan provides a predictable benefit.
- Most costly type of plan.
- Most administratively complex plan.
- An excise tax applies if the minimum contribution requirement is not satisfied.
A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Complicated actuarial assumptions and computations are required to calculate the "defined" benefit which not only produce large employer contributions but also make a defined benefit plan a more costly plan to maintain administratively.
If a business has a 401(k) plan that is being fully funded each year yet wants to save more towards retirement, a defined benefit plan may be an option to consider. Why?