Retirement

DEFINED-BENEFIT PLAN
With so many retirement options to choose from, one has to wonder where the idea for retirement programs first began. In 1875 American Express adopted the first defined benefits (DB) program to help their employees plan for retirement. Subsequently, these plans spread through different industries to become one of the most popular retirement vehicles amongst employers.

According to the IRS website, approximately 38,000 insured DB plans exist today compared to a high of 114,000 in 1985. Today, employers continue to empower their employees to manage their retirement plan through a defined contribution plan. In return, it helps minimize their costs to manage these types of retirement plans.

What is a Defined Benefits (DB) plan?
It's a simple qualified employer-sponsored retirement plan. DB plans offer tax incentives to both employers and participating employees.

For example, your employer can generally deduct contributions made to the plan, while employees won't owe taxes on those contributions until they begin receiving distributions.

Note: these tax incentives must comply with a complex set of rules under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code and should be determined by a qualified professional CPA

Who should start a DB plan?:

High-income single employers (approximately $100,000+ annual gross income)

Individuals in their middle-age or older (approximately 45 and above)

Those interested in contributing heavily into their retirement plan

Why should an employer start a DB plan?:

Highly deductible contributions

Potential to become a major source of an individuals retirement

How it works:
A DB plan is designed to pay out a "target" level of annual benefits from an account after you reach retirement age.

The target benefit can be based on:

A fixed percentage of your average salary or self-employment income over your entire career with your business, over a certain number of years near the end of your working life.

A flat monthly dollar amount.

A formula based on years of service in your small business.

An employer (if self-employed) or your company (if you are employed) will make annual deductible contributions to your account in amounts calculated to be sufficient to fund the target level of retirement benefits.

Consequently, if the target benefit is high, more money must be pumped into the account to get it fully funded before retirement age.

Note: the maximum annual funded target benefit for the 2009 tax year is $195,000 (adjusted annually for inflation).

Highlight: DB plans allow a large annual contributions with the advantage of having those contributions be a deduction. This means ther government is subsidizing you to supercharge your tax-favored retirement fund.

To see if a defined benefit plan is appropriate for you, please contact one of our retirement experts to review your current plan.

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