Defined Benefit Plan FAQs
Looking to gain more knowledge about Defined Benefit Plans? Read our FAQs
Defined Benefit FAQs
Can I borrow money from the plan?
Yes, if allowed by the plan, maximum loans are the lesser of (a) 1/2 of your vested benefit or (b) $50,000. Loan terms generally allow no longer than five (5) years for repayment.
Is there anything else I can do in ADDITION to the Defined Benefit Plan to get more tax deductions and additional retirement contributions?
Yes. The Pension Protection Act of 2006 added the ability to also adopt a 401(k)/Profit Sharing Plan and contribute up to 6% of total eligible payroll to a profit-sharing plan along with the 401(k) deferral maximum.
Which employees must be covered under the plan and does that include leased employees?
Generally, all common-law employees and leased employees who have met the plan’s eligibility requirements must be considered for plan participation. In some cases, there is the possibility of excluding some employees by job title or other reasonable classification.
Are the benefits under the plan guaranteed?
A. Certain plans are insured by the Pension Benefit Guaranty Corporation (PBGC) and must file annual forms and make premium payments. Plans that fall in this category have some or all of their benefits guaranteed by this government entity. The premiums are generally pretty modest.
B. Many small professional organizations are exempt from PBGC coverage and, therefore, cannot be covered by the PBGC. Benefits under these plans are not guaranteed, although many are still protected from creditors under bankruptcy proceedings either via state bankruptcy statutes and/or through a 1992 U.S. Supreme Court ruling (if meet similar fact pattern).
Can I terminate the pension plan and when can I do so?
Yes, a plan can be terminated at any time. There is no required number of years, but keeping a plan for at least 3 years is the most accepted standard. Terminating a plan before this time may still be acceptable to the IRS if retirement occurs, or the business is sold or closed down or there are other extenuating circumstances.
Terminating a plan can be complicated and require notices, elections, tax withholding, etc. Please contact our office for specific instructions.
What are the available vesting schedules?
Most small defined benefit plans use one of the following vesting schedules:
A plan is allowed to use a MORE generous schedule.
0-1 Year = 0%
2 Years = 20%
3 Years = 40%
4 Years = 60%
5 Years = 80%
6 Years = 100%
“3-Year Cliff Schedule”
0-2 Years = 0%
3 + Years = 100%
What is the longest eligibility waiting period you can use?
Usually one (1) Year of Service is the longest eligibility waiting period. A Year of Service is generally defined as a twelve month period in which the employee works 1000 hours (equates to about 20 hrs. per week). A maximum age of 21 can also be used as a requirement.
Do I have to be incorporated to sponsor a retirement plan and claim deductions for contributions?
No. A plan can be sponsored by any type of business entity (including most non-profit organizations) whether or not incorporated. Under any of these types of entities the contribution that is calculated within IRS prescribed limitations is 100% deductible.