Defined Benefit Plans

Instead of accumulating contributions and earnings in an individual account like defined contribution plans (profit sharing, 401(k), money purchase), a defined benefit plan promises the employee a specific monthly benefit payable at the retirement age specified in the plan. Defined benefit plans are usually funded entirely by the employer. The employer is responsible for contributing enough funds to the plan to pay the promised benefits regardless of profits and earnings.

Employers who want to shelter more than the annual defined contribution limit ($40,000 in 2002 and 2003) may want to consider a defined benefit plan since contributions can be substantially higher resulting in fast accumulation of retirement funds.

The plan has a specific formula for determining a fixed monthly retirement benefit. Benefits are usually based on the employee's compensation and years of service, which rewards long-term employees. The maximum benefit allowable is 100% of compensation (based on highest consecutive three-year average), up to a maximum annual benefit of $160,000 (2002 and 2003 limit).

Contact us to help set up a defined benefit plan for your company.