Defined Benefit Pension

Topics: Pension, Cash balance plan, Balance sheet Pages: 4 (1308 words) Published: August 14, 2010
When participating in a defined benefit pension plan, an employer promises to pay their employees a specific benefit for life beginning at retirement. The benefit is calculated in advance using a formula based on age, earnings, and years of service. In the United States, the maximum retirement benefit permitted in 2009 under a defined benefit plan is $195,000. Defined benefit pension plans currently do not have contribution limits. The liability of the pension lies with the employer who is responsible for making the decisions. Employer contributions to a defined benefit pension plan are based on a formula that calculates the investments needed to meet the defined benefit. These contributions are actuarially determined taking into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover. Employees are always entitled to the vested accrued benefit earned to date and if an employee leaves the company before retirement, the benefits earned so far are frozen and held in a trust for the employee until retirement age. The defined benefit pension plan must allow its vested employees to receive their benefits no later than the 60th day after the end of the plan year in which they have been employed for ten years or leave their employer. Employees who reach age 65 or the specified retirement age in their plan can also collect the benefits. The plan cannot force you to receive your benefits before normal retirement age unless you have less than $5,000 vested in the plan. However, you must begin to receive your benefits no later than April 1 following the last year of employment or age 70½, whichever is later. Defined benefit plans distribute their benefits through life annuities. In a life annuity, employees receive equal periodic benefit payments for the rest of their lives. A defined benefit pension plan allows joint distributions so a surviving...
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