A defined benefit plan is a retirement plan in which employers provide guaranteed retirement benefits to employees based on a set formula. In a defined benefit plan, a company takes charge of its workers’ retirement income. Using a formula based on each worker’s salary, age and time with the company, an employer will pay into and manage a retirement plan. In retirement, the workers draw a dependable check from the company plan, regardless of how the market performs. That’s what makes the benefits defined. The company bears the risk of stock market fluctuations, meaning that the worker doesn’t have to worry that a downturn will make retirement unaffordable.
Cash Balance Pension Plans
A cash balance pension plan is a pension plan with the option of a lifetime annuity. For a cash balance plan, the employer credits a participant’s account with a set percentage of their yearly compensation plus interest charges.
- A cash balance pension plan is one in which participants receive a set percentage of their yearly compensation plus interest charges.
- The benefit of such plans is that contribution limits increase with age.
- People 60 years and older can save well over $200,000 annually in pretax contributions compared to a 401(k) where total employer and employee contributions for those 50 and older are limited to $63,500 in 2020.
Benefit Focused Plan
Benefit-Focused Defined Benefit (BFDB) pension plans were developed by some of the
country’s leading accountants, tax lawyers and actuaries as a response to the statutory
dollar limit and excise tax. They were further refined and solidified as a result of the 2006
Pension Protection Act. With the BFDB design, the dollar limit is based on a joint life income annuity actuarial calculation at age 65 and does not permit a lump-sum payout. Contributions are based on the amount it would take to provide a joint lifetime monthly retirement income.
Ideal Candidate Profile:
- Business owner is earning a high income and is exposed to combined Federal and state
income taxes that can exceed 50% in some states, including California;
- Business owner wants to reduce his/her Federal and state income tax bill; and,
- Business owner wants to maximize tax-deductible contributions to a plan that provides
retirement and estate planning benefits to him/her and the owner’s family