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Defined Benefit Retirement Plan

DEFINED BENEFIT RETIREMENT PLAN

A defined benefit plan is a tax-qualified retirement plan that may allow an employer to make larger contributions than 2other retirement plans. It may be well suited for an employer who desires to shelter the maximum amount allowed. Annual contributions, which are actuarially determined, are required. A company with one or more principal employees who are within fifteen years of retirement may generally be a good candidate for this type of plan.

The annual contribution is determined by an actuary at the inception of the plan. It is the responsibility of the actuary to calculate the contribution necessary to provide the specified retirement benefits given a set of assumptions. Once the contribution level has been set it is fixed and the employer must make these contributions regardless of profits in any specific year. Because of this, a company should have a history of strong, steady cash flow before making a commitment to a defined benefit plan.

The maximum benefit that a defined benefit plan can provide is the lessor of 100 percent of the employee's annual compensation or an amount determined by the Secretary of the Treasury, which was $118,737 for 1994. This amount is indexed for inflation each year.

As a result of the complex nature of the defined benefit plan the start up and administration expenses are relatively high. A defined benefit plan can also be combined with a defined contribution plan to allow an employer more flexibility.

The above information on qualified retirement plans is general in nature and meant only to provide an overview. Before making any decisions, a careful legal and tax analysis should be made with the assistance of competent legal and tax advisors.