Defined Benefit Pension Plan

A defined benefit pension plan is an employer-sponsored retirement plan that is highly beneficial to majority owners and key executive employees. The lump sum at retirement is calculated by the actuarial based on many factors, such as three consecutive years of high salary, number of years until retirement, length of employment, actuarial interest rates, and 415 limits set by the IRS to name a few,. Based on the lump sum at retirement, reverse engineering is used to calculate the range of contributions each year. The contribution range under the Defined benefit plan is huge, providing higher tax savings and faster accumulation of assets.

Typically, these plans are fully funded by the employer, making them responsible for contributing sufficient funds to fulfill the promised benefits, irrespective of the company’s profitability or earnings. It’s important to emphasize that employer contributions to meet the plan’s obligations are mandatory and may fluctuate due to gains or losses in plan investment strategies. Therefore, the actuary’s role is crucial in managing investment risk, interest rate risk, and longevity risk to ensure that the plan is sufficiently funded each year within the guidelines of the IRS. All defined benefit plan contributions are tax deducted on the corporate tax return.