Finishing up our series on benefits of employer sponsored plans, we are going into defined benefit plans, also knowns as pension plans. Defined benefit plans, on the other hand, promise a specified benefit at retirement, for example, $1,000 a month. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.
- Defined Benefit Plans (Pension Plans)[i]
Also known as a pension plan or qualified-benefit plan, a defined benefit plan provides a fixed, pre-established benefit for employees at retirement. Employees do not contribute to the plan, and all the investment risk and responsibilities lie with the employer who is managing the plan. Because of this, many individuals who set up defined benefit plans are a sole owner or one of just a few employees.
However, these plans can be helpful for business owners who are behind on saving since they allow the largest retirement contributions and most tax savings.
In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:
- 100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or
- $265,000 for 2023 ($245,000 for 2022; $230,000 for 2021 and 2020; $225,000 for 2019)
Because of these limits, employers can squeeze twenty years of savings into ten and catch up on retirement saving if his or her income allows.
Other Types of Retirement Plans
While these are the most popular types of employer-sponsored retirement plan options, this list is by no means exhaustive. There are also 403(b)s, 457(b), and TSPs which are very similar to the 401(k) defined benefit plans and money purchase or 401(a) plans.
Regardless of the size of your business, you have many options for employer-sponsored retirement plans that you can offer as part of your benefits package. It starts with researching all the options available and deciding which plan makes the most sense for you based on your business’s needs and values.
Now that we have gone through a high-level explanation of some of the options available to business owners and employees. We are hopeful that you have a better understanding of the benefits for not only employees but business owners as well. If you’re interested in getting more clear on any of these options, please don’t hesitate to give our office a call and we’d be happy to explain in further detail what would work for your specific situation.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.