Thank you for attending this session on Defined benefit plans. The information in this session isn’t official guidance.

Now, let’s get started.

Our topic today is defined benefit plans (or DB plans). What is a defined benefit plan?

In these plans, the employer guarantees the benefit that the participant will receive at retirement, whereas in defined contribution plans, employees do not receive a specific or stated benefit at retirement.

In a defined benefit plan, the employer assumes liability for the return on investments (or earnings), while in a defined contribution plan, the employee assumes the risk.

These types of plans typically allow employers to contribute more than they could contribute under other types of retirement plans.

This means participants can often receive a benefit under a DB plan that is higher than what they would receive with a defined contribution plan. However, defined benefit plans are much more complex to maintain and require the use of an actuary to determine required contributions and funding levels.

Our discussion today is limited to traditional defined benefit plans.

There are more complex defined benefit plans that may be available, but we won’t be covering those in this presentation.

Now, let’s now look at the requirements for maintaining a traditional defined benefit plan to help you decide if this is the right plan for your small business.

What are some requirements for a defined benefit plan? To set up your defined benefit plan, you can adopt a pre-approved plan issued by a financial institution or an individually designed plan. Form 5500 must be filed annually for defined benefit plans.

Additionally, Schedule SB should be attached to the Form 5500 and must be signed by the plan’s actuary. Defined benefit plans also require Adjusted Funding Target Attainment Percentage (AFTAP) certifications and actuarial valuations that are typically provided annually by the plan’s actuary. What are the eligibility requirements to maintain a defined benefit plan? Any type of employer can setup a defined benefit plan.

Also, the employer can choose to maintain other retirement plans (for example, a 401k) in addition to the defined benefit plan.

What are the eligibility requirements for employees to participate in the plan? Employers can’t require employees to complete more than 1 year of service or be older than age 21 to enter the plan.

However, the employer can choose to adopt more lenient eligibility requirements (for example, they may require less than 1 year of service or age 18).

Let’s talk about defined benefit contributions.

How much can be contributed to a defined benefit plan?

Employers and employees can typically make contributions to a defined benefit plan.

Employee contributions can be voluntary or required.

However, most contributions are made by the employers. Also, the contribution limits for defined benefit plans are typically higher than those for defined contribution plans. That means employers can put more money in the defined benefit plan than in other plans. Another feature of defined benefit plans is that once the benefit is accrued, it can’t be reduced retroactively.

What type of employer contribution is required? Employer contributions are required to meet the benefit stated in the plan.

An actuary should determine how well the plan is funded each year, and part of this analysis will include the calculation of a required minimum contribution. This is the minimum amount the employer should contribute to the plan. Thus, employer contributions will typically fluctuate from year to year.

Contributions are partially based on the return achieved by the investment of plan assets and the actuarial assumptions stated in the plan.

If the plan is not able to realize a decent return on investment, the employer will be required to contribute more money in order to meet the required minimum contribution to keep the plan funded.

Let’s move on to defined benefit plan withdrawals and loans.

What are the withdrawal options with a defined benefit plan?

These plans can require participants to complete up to 7 years of service to be 100% vested in their benefit, but they can vest participants more quickly if they choose.

Typically, in-service distributions are not allowed from a defined benefit plan before the participant reaches age 59 1/2.

This includes hardship withdrawals. Distributions from a DB plan can also be further limited if the plan is not properly funded.

While a DB plan typically can’t make in-service distributions, they can provide for participant loans that must be repaid to the plan What are pros and cons of maintaining a defined benefit plan?

Substantial benefits can be provided and accrued in a short time – even with early retirement Employers can contribute (and deduct) more than under other retirement plans The plan provides a predictable benefit Vesting can follow a variety of schedules that can be spread out over 7 years Benefits are not dependent on asset returns Most costly type of plan / Most administratively complex plan An excise tax applies if the minimum contribution requirement is not satisfied An excise tax applies if excess contributions are made to the plan Withdrawals are typically restricted What are some additional defined benefit resources that are available to you?

If you visit our website at www.irs.gov/retirement and select “Types of Retirement Plans” and then select “Defined benefit plans,” you’ll find a wealth of helpful information on these types of plans. Also, you may want to look at Publication 3998, Choosing a Retirement Solution for Your Small Business for a comparison of different retirement plan options.

Publication 575 discusses the taxability of pension and annuity income. Additionally, you’ll want to check out our correcting plan errors page if you have a defined benefit plan and find errors with your plan.

These resources are available on our webpage at www.irs.gov/EP.

Please send any questions or feedback to us at tege.outreach@irs.gov.

We’ve covered some features of defined benefits plans, pros and cons of maintaining this type of plan and some additional resources available to you to setup and operate your defined benefit plan.

We hope this session will help you decide if a defined benefit plan is right for you. Thank you for attending.