National Pensions - CPA Oriented » Traditional Pension
With the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) it has become once again advantageous to have business owner sponsor defined benefit plans. A defined benefit plan can reduce taxes, retain key employees and provide funds for retirement, death, and disability all on a tax favored basis. Defined benefit plans work backwards to determine contributions.
For example, the maximum benefit in 2010 is a lifetime income of $195,000 a year for the rest of your life or your salary if it is less than this amount. How much do you need to put in the plan to achieve this result? Unfortunately, this becomes a mathematical question which interplays with IRS laws and regulations. For example, you are not allowed to fund the entire amount in one year. You must spread the funding to age 62 or 65. Another rule states you must fund over 10 years, or you must reduce the amount you can have as a benefit in the play by 10% each year you fund less than 10 years. Since the rules are complicated, although the math is straightforward, this area is dominated by enrolled actuaries who comb through the rules and calculate your contribution.
There are certain parts to the puzzle you need to be familiar with such as definitions of terms that are unique to defined benefit plans. These definitions are published in the IRS listing of required modifications. Traditional defined benefit plans came into existence to help railway workers retire, steelworkers, automobile workers, and industrial age workers plan for retirement if they were still alive at age 65. Many people who worked on farms did not have retirement plans. The unions negotiated plans for their employees and hence most traditional plans come from collective bargaining units of major corporations.
The documents are controlling as to the rights, benefits, and features of the plan. These are private pension plans, so the documents are not registered or produced except to the employees and the various government agencies. The document provides the answers to the rights of the employees in the assets of the plan. The testing for compliance is actually done outside of the document by an enrolled actuary who looks at the document and data to render an opinion on operational compliance of the plan.