A defined benefit plan is one in which the monthly retirement
benefit to be provided at retirement is defined in the
plan. Benefits are usually defined in terms of the participant's
compensation, service, and/or participation and are expressed
in terms of a monthly benefit commencing at the participant's
normal retirement age (as defined in the plan). For example,
a plan that entitles a participant to a monthly pension
for his or her life or equal to a certain percentage of
monthly compensation is a defined benefit pension plan.
In many cases, the actual payment of the benefit is
in a form other than the plan's normal annuity form. These
other forms of benefits are called alternate forms and
are actuarially equivalent to the normal form of benefit,
an example is a lump sum benefit payment of the actuarial
present value of the participant’s accrued benefit.
Because there is an annual minimum funding that is required
to be made to a Defined Benefit Plan an employer has much
less flexibility toward the annual contribution. For this
same reason it can allow for much greater contribution
than you will find in a Defined Contribution plan.
A defined benefit plan can allow for contributions far
exceeding the limitations of profit sharing plans. This
makes it an ideal plan for older employees wishing to
save large amounts quickly, or for employers wishing to
establish a secure traditional retirement plan for their
employees.
A cash balance plan is a defined benefit plan that simulates
a defined contribution plan. Benefits are defined by a
formula similar to the allocation formulas in a profit
sharing plan with account balances credited with a fixed
rate of return and converted to a monthly pension benefit
at retirement.
This monthly pension benefit is funded as a traditional
defined benefit plan. As with a traditional defined benefit
plan, cash balance plans allow the employer to exceed
the limitations on contributions seen in profit sharing
plans.
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