Tags: Retirement | defined benefit plans | retirement

What Are Defined Benefit Plans

By    |   Wednesday, 12 August 2015 02:13 PM

Employers put money into defined benefit plans that assist employees during retirement. The plans are a type of pension plan in which participants receive payouts after retirement that could come in the form of monthly checks or one lump sum.

Defined benefit plans don’t usually accumulate as much money as other federally qualified retirement plans, according to CNN Money. A basic formula is devised for the plan, based on how much money employees earn and how long they’ve been with the company. Businesses can have other types of retirement plans as well, so employees are often encouraged to participate in those outside of the defined benefit plan to accumulate more retirement savings.

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Employers are allowed to contribute more to the plans than under other qualified retirement plans, the IRS explained. Employers can also use the contributions as tax deductions. The plans are more costly for the employer than with other plans.

For employees, the benefits are predictable because of the set formula and depend on employer contributions, which are limited. However, employee contributions are allowed to be voluntary or required by companies if they choose. In-service distributions for employees are generally allowed at age 62.

Employees working for companies that only have employer contributions avoid taxes on the contributions and accumulated money until retirement. Employees also know how much they will be getting and when because of the fixed benefits in the plans.

Employees with defined benefit plans don’t have to worry about investment performance because the benefits are already set and outlined, and most plans are insured up to a certain amount through the federal government, according to AXA Equitable Financial Services.

Defined benefit plans usually require employees to work a certain number of years with the company. If they leave earlier, they may not receive any benefits or not the full amount.

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Calculations for retirement benefits vary. They may include a set amount for each year the employee has worked for the company, a certain percentage of earnings, or basing benefits on the employee’s average earnings in the last few years of employment.

Defined benefit plans might allow employees to choose their form of retirement payout, which could be a lump sum, an annuity that pays out until the retiree dies or an annuity that also offers a percentage to a spouse after the participant dies.

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Employers put money into defined benefit plans that assist employees during retirement. The plans are a type of pension plan in which participants receive payouts after retirement that could come in the form of monthly checks or one lump sum.
defined benefit plans, retirement
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2015-13-12
Wednesday, 12 August 2015 02:13 PM
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