Compensation & Benefits Consulting

What is 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.

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