The traditional defined pension benefit plan is designed to provide a specific amount of retirement. Employers bear the risk of providing a promised level of retirement benefits to participants.
Contributions & Eligibility
Unlike defined contribution plans, defined benefit plan limits are based on the benefits to be received at retirement, not on the annual contributions. Each year, the plan’s actuary determines the required annual contribution based on factors, such as age, salary level and years of service, as well as interest rate assumptions. The maximum annual benefit that a plan may fund is 100% of a participant’s compensation or the current indexed limit, whichever is less.
Eligibility requirements are the same as those for defined contribution plans.
Advantages of a Defined Benefit Pension Plan
- For participants closer to retirement, contributions to a defined benefit plan may exceed the 100% or $66,000 limit for 2023 imposed by defined contribution plans.
- This plan type may be advantageous to a business owner who is approaching retirement
age, has never started a retirement plan, and wishes to quickly contribute as much money as possible. - A defined benefit plan can also be advantageous to employers seeking to provide a fixed benefit or to favor older employees.