What
are the Advantages of DB Plans?
What
are the Advantages of DB Plans?
These two differences result
in two key advantages of a defined benefit plan:
| 1. | Because it promises a benefit at retirement that is not a function of investment results, a defined benefit plan is the most efficient way to provide a guaranteed level of retirement benefit for employees. The plan can be designed to manage the work force by encouraging early or later retirement, and the employer cost can be reduced by favorable investment returns. |
| 2. | Because the IRS limits benefits, not contributions, and the plan promises benefits at a specific age, a defined benefit plan can provide for a much larger tax deduction and accumulation of retirement funds on a tax favored basis for the older business owner or key employee. See the following illustration of defined benefit plan deductions compared to defined contribution plan deductions. |
The chart below compares maximum annual deduction amounts under defined contribution plans and defined benefit plans. The example is based on a business owner earning $100,000 annually from his or her business.
As you can see, the maximum amount deductible for a
combination of defined contribution plans for this business owner is $25,000,
regardless of current age or planned retirement age. The chart displays
the significant advantage of the defined benefit plan for business owners
who are at least 45 years of age. The annual deductible contributions
are consistently in excess of $25,000. In most cases, the defined
benefit contributions are triple or quadruple the deductible limit
for defined contribution plans.
