At retirement age 59½, distributions are generally made for the remainder of each employee's life using a formula based on the employee's earnings and years of service. As with all qualified plans, neither the employer nor the employee pays tax on the initial contributions or accumulated earnings; however, the employer determines the level of contributions needed to provide tax-deferred benefits to all current and future employees. Of course, the federal Pension Benefit Guarantee Corporation (PBGC) ensures employees receive a minimum pension benefit in the event the employer is unable to pay the promised benefits in full. For example, this could happen if a plan is terminated due to employer bankruptcy or if a division of a company is closed. The PBGC then takes over as the trustee of the pension plan. Benefits paid out may be less than what was initially stated and comprises plan funds as well as those of PBGC.
Because of the costs and risks associated with defined benefit plans, however, their use is most often limited to larger companies who can pay those expenses and run those risks — which may account for their recent drop in popularity.
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