A defined benefit plan in some way specifies the benefit the plan participant will receive at retirement (usually in the form of monthly income). The benefit to be paid to each participant at retirement is specified by the plan as a fixed benefit based on age, service and/or salary. The benefit amount may also be integrated with Social Security retirement benefits.
The amount contributed to the plan by the employer depends on the projected value of the benefit to be received at retirement, which in turn is based on a formula that usually involves years of service and/or final average salary. A larger annual contribution will be required to fund the same benefit for an older employee than for a younger employee. The liability for any funding shortfall lies solely with the employer.
If the plan is combined with another defined contribution or profit sharing plan, the total deductible contribution is limited to 25 percent of eligible compensation. Non-deductible contributions can be avoided by limiting the amount contributed to the defined contribution plan.
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