THE BASICS: Employer contributes an actuarially determined amount sufficient to pay each participant a fixed or defined benefit at his or her retirement.

HOW IT WORKS

	Employer contributes an actuarially determined amount each year to the plan.
	Employer contributions are tax deductible. IRC Sec. 404(a).
	Contributions are not taxed currently to the employee. IRC Sec. 402 and 403
	Earnings accumulate income tax-deferred. IRC Sec. 501(a).

METHODS OF DEFINING THE BENEFIT

	LEVEL PERCENTAGE PLAN. Example: The benefit is equal to 50% of compensation, reduced by 1/25th for each year of participation less than 25 years.
	STEP RATE SERVICE WEIGHTED FOR PRIOR SERVICE. Example: The benefit is equal to 4% of compensation for the first five years of service plus 3% of compensation for all other years but not to exceed a total of 15 years.
	SERVICE PLAN. Example: The benefit is 2.5% of compensation for each year of service.   Younger participants may also be favored if the benefit formula is service related.
	PARTICIPATION PLAN. Example: The benefit is 5% of compensation per year of participation with a maximum of 20 years.

ADDITIONAL CONSIDERATIONS

1. INVESTMENT OF PLAN ASSETS. Plan assets can be invested in equity products, like mutual funds, stocks, debt free estate, or debt instruments, like T-Bills, CD's, or in insurance products, like life insurance and annuity policies.

2. SOCIAL SECURITY INTEGRATION. Since the employer already contributes to the employee's social security retirement benefit, these benefits can be integrated into the benefit formula plan.

3. PARTIES WHICH ARE FAVORED. Favors older employees.

MAXIMUM BENEFIT

Maximum benefit under a Defined Benefit Plan is measured in two ways:

1. PERCENTAGE: The retirement benefit cannot exceed 100% of the average compensation for the highest 3 consecutive years of service. This is reduced by 10% for each year of service less than ten.

2. DOLLAR AMOUNT: The maximum dollar benefit is indexed at $185,000 per year (2008) for retirement between age 62 and age 65.  For earlier retirement, this amount is actuarially reduced. The dollar amount will also be increased for late retirement, subject to the percentage and dollar limitations. Lastly, if the individual has less than 10 years of participation at normal retirement age, the dollar amount is reduced proportionately.   This benefit is actuarially increased for Normal Retirement after age 65 and actuarially decreased for NRA prior to age 62.

FIRST YEAR CONTRIBUTIONS

A number of assumptions must be made in determining the amount of current contributions necessary to accumulate the future retirement benefit. These assumptions include the following:

	Interest rate on earnings		Death benefits
	Annuity rates at retirement		Retirement age
	Statutory requirements and limits		Form of annuity
	Participants' current ages		Various government interest rates
	Salary increases

ANNUAL CONTRIBUTIONS

Year to year contributions will fluctuate based on the following:

	Earnings on previous contributions
	Gains and losses on investments (realized & unrealized)
	Participants' actual compensation
	Death of participants before retirement
	Disability retirements
	Age mix of participants
	Turnover in participants
	Cost of annuities at retirement
	Use of life insurance
	Timing of contributions
	Assumptions mandated by IRS in calculations
	Funding limits and requirements of the Internal Revenue Code
	Legal/actuarial requirements.

Annual funding is done on the assumption that each participant will retire. Accrued benefits are earned each year and if the participant does not work until scheduled retirement, he or she will not be entitled to the entire benefit.

I.  ADVANTAGES TO EMPLOYER

	Contributions are tax deductible.
	Can reward long term employees with a substantial retirement benefit even though they are close to retirement age.
	Larger contributions for older employees may reduce corporate tax problem.
	Forfeitures of terminating employees will reduce future costs.
	It can provide employees with permanent life insurance benefits that need not expire or require costly conversion at retirement age.
	The employer directs investments.

II. ADVANTAGES TO EMPLOYEES

	Annual contributions are not taxed to the participant.
	Earnings are not currently taxed.
	Participants may also have a deductible IRA, subject to income levels and filing status.
	There is the ability to purchase significant permanent life insurance, which is not contingent upon the company group insurance program.
	Employee is guaranteed a known retirement benefit.
	Employee can borrow from the plan within certain very strict legal guidelines, if provided for in the plan documents.

III.  DISADVANTAGES TO EMPLOYER

	In low profit years, the employer is often still obligated to make contributions.
	Even if profits are low, there is less flexibility with the level of contribution than with some other types of plans.
	Investment risks are on the employer.
	Administration costs are higher because an actuary must certify as to the reasonableness of the contribution and deduction (unless it is a fully insured plan).
	Participants often do not understand the Defined Benefit Plan as easily as they do other types of plans.
	If the termination of an overfunded plan causes a reversion of assets to the employer, it will be subject to a 50% excise tax, which can be reduced in some cases.
	If there are rank and file employees, and the plan terminates, there will probably be insufficient assets to pay all accrued benefits. The shortfall must be made up by either the business making a contribution (which may or may not be deductible), or by the assets being reallocated from highly compensated participants to non-highly compensated participants.

IV.  DISADVANTAGES TO EMPLOYEES

	Younger employees will not receive as great of a benefit as they would under other types of plans.
	The plan concept is more difficult to understand.