Defined Benefits
DB plans stipulate the monthly payments that employees will receive upon attaining the plan’s retirement age.

The Internal Revenue Code and IRS regulations set a maximum monthly benefit payable for retirement ages between 62 and 65 (the “dollar limit”).  For retirement before age 62, the dollar limit is actuarially decreased, and for retirement ages over 65 it is actuarially increased.  At least 10 years of plan participation are required for the full dollar limit (e.g. an employee retiring with 5 years of plan participation cannot receive more than one-half of the dollar limit as a monthly benefit).  The dollar limit is indexed to inflation.

Additionally, the Code and regulations set a “percentage limit”.  Employees cannot receive a monthly pension in excess of 100% of average monthly compensation, pro-rated for less than 10 years of service upon retirement (e.g. an employee retiring with 7 years of service with the employer cannot receive more than 70% of average compensation as a monthly benefit).

DB plans are geared toward employers who are willing to commit to required minimum funding for at least five years.  You, as plan sponsor, assume the risk of investment gains and losses (gains generally reduce your funding obligations, while losses generally increase finding requirements).  Depending on employee demographics, DB plans can generate larger retirement accumulations and deductible employer contributions than Defined Contribution plans.  Incentive Benefits will design and maintain your DB plan to meet your retirement and deduction goals.  Some flexibility is available to you as long as amendment deadlines are met.  Incentive Benefits  will certify minimum and maximum funding requirements each year.

In a traditional Defined Benefit Pension Plan, monthly pension payments are usually defined as a percentage of the participant’s average monthly compensation and, due to IRS non-discrimination rules, are generally pro-rated for less than 25 years of participation upon retirement.

Example:  DB plan provides for a monthly pension equal to 125% of Average Monthly Compensation, reduced 1/25 for each year of plan participation less than 25 at retirement.  An employee who retires after 16 years of plan participation would receive a monthly pension equal to 80% of his or her Average Monthly Compensation (125% X 16/25).  This benefit may be limited to the lesser of the “dollar limit” or “percentage limit” as discussed above.

Other benefit designs are available to plan sponsors within IRS guidelines (see also the “Cash Balance Plans” tab).  Incentive benefits can custom-design a benefit structure to meet your unique business objectives.

Benefits can be subject to a vesting schedule (generally not more than six or seven years or service for full vesting).  The “forfeited” benefits of partially-vested terminated participants can reduce the plan sponsor’s funding obligations.

Cash Balance
A type of Defined Benefit plan that folds in some of the aspects of a Defined Contribution plan. Retirement benefits are based on an annual employer contribution and a theoretical earnings rate. When projected to retirement age, these contributions and earnings guarantee a monthly pension payment.

Profit Sharing

Profit sharing plans, which are a type of Defined Contribution retirement plan, offer the flexibility for the plan sponsor to make an annual contribution of between 0% and 25% of the aggregate considered compensation of those participants who receive a share of the contribution. Contributions are not limited to profits and are not required every year but must be “ongoing” to avoid a deemed termination of the plan.  Each participant’s allocation can be “offset” by a portion of the employer’s Social Security contributions.

For allocation purposes, each participant’s annual compensation is subject to a cap.  The cap is indexed to inflation.  Each participant’s contribution allocation is limited to the lesser of 100% of compensation or the “dollar limit” which is also indexed to inflation.

PS plans can be designed to offer benefit payments prior to retirement with certain restrictions.

Benefits can be subject to a vesting schedule (generally not more than six or seven years of service for full vesting). The “forfeited” benefits of partially-vested terminated participants are generally allocated to the accounts of the remaining participants or used to pay the costs of the plan.

Money Purchase Plans
The employer has a fixed obligation to contribute to a money purchase plan. There is also a fixed formula for allocating the contributions to the account of each participant in the plan.
Benefits may be paid only upon death, disability, separation from service or retirement. No in-service distributions are permitted prior to the attainment of normal retirement age under the terms of the plan.

401(k) Plans

401(k) plans shift some of the funding obligation from the employer to the employees.  Each employee gets to determine the amount of compensation deferred into his or her retirement account.  Employers can elect whether or not to match employee contributions.  As part of a Profit Sharing plan (see “Profit Sharing Plans” tab), employers have the flexibility to make additional tax-deductible contributions to employee accounts.

Owners and high-paid employees are limited in the amount of compensation they can defer into the plan, based on the average rate of deferrals for rank-and-file employees.  Incentive Benefits will perform non-discrimination testing on a regular basis to make sure your plan stays in compliance, as well as offer “safe harbor” solutions which allow you to bypass this discrimination test.  If “corrective distributions” to owners and high-paid employees are your chosen remedy, Incentive Benefits will ensure these corrections are completed in a timely fashion to avoid IRS penalties.

Most 401(k) plans are designed to have the employees direct their own investments among a family of funds chosen by the plan sponsor, but the investments can be directed by the Trustees.  Incentive Benefits can work with virtually any investment provider of your choosing.

Employee contribution accounts are always fully vested.  Employer-funded benefits can be subject to a vesting schedule (generally not more than six or seven years or service for full vesting).  The “forfeited” benefits of partially-vested terminated participants are generally allocated to the accounts of the remaining participants.

An employee stock ownership plan (ESOP) may be either a profit-sharing plan or a money purchase pension plan, but it must be invested primarily (more than 50%) in the stock of the employer. The employer makes a contribution to the plan that is used to purchase stock of the employer or the employer contributes its stock to the ESOP.


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