9.5 Defined Benefit Plans
Defined benefit plans are pension plans, devised through a specifically designed formula to provide future benefits that are tied to the employee's years of service, amount of compensation, or both. To qualify for federal tax purposes, the plan must provide:
- definitely determinable benefits;
- systematic payment of benefits over a designated period of time (usually for life) after retirement; and
- primarily retirement benefits.
The maximum annual benefit an employee may receive is limited and set by tax law and must be indexed for inflation - the lesser of 100% of the employee's average compensation in the highest three consecutive years of employment or $200,000 (2012; $195,000 in 2011).
A defined benefit plan is a pension plan under which benefits are determined by a specific benefit formula.
Know the difference between defined contribution plans and defined benefit plans.
