This type of plan provides a "defined benefit" to eligible
employees. For example, the benefit could be defined as a monthly
income equal to 50% of a participants' average compensation,
payable for life, beginning at age 65.
The maximum lifetime annual benefit that can be provided is 100%
of a participant's 3-year highest average compensation, or
$160,000, whichever is less. Defined benefit plans are subject to
minimum funding requirements. The deductible contribution to the
plan is determined annually by the plan's actuary, and therefore,
provides the employer with limited flexibility in determining
contribution levels. The plan favors older employees since the
funding requirement increases when the number of years to fund
decreases. The chart below demonstrates this characteristic of
defined benefit plans:
| Participant's Age |
Years to Retire |
Annual Benefit |
Cash Required |
Required Contribution |
| 55 |
10 |
160,000 |
1,667,333 |
126,497 |
| 45 |
20 |
160,000 |
1,667,333 |
45,236 |
| 35 |
30 |
160,000 |
1,667,333 |
21,090 |