Defined Benefit Plans
A pension-style plan can serve your employees well
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Defined benefit plans have been a popular way for companies to provide employees with retirement benefits. Under such plans, the company contributes amounts each year and employees are provided a certain amount of money in retirement. First American Bank can help your business decide which type of plan fits your individual needs and help craft a plan document that guides long-term plan operations.
A traditional defined benefit plan bases monthly retirement benefits on a formula stated in the plan document. The formula is often an amount earned for each year of service and is based on a specific dollar or a percentage of compensation.
- Company contributions are actuarially determined each year based on the projected benefits at retirement and the current value of the plan account.
- The annual minimum required contribution must be deposited within 8-1/2 months of the plan year end to avoid penalty.
- When a distribution is payable upon termination or retirement, the normal form of benefit is a monthly annuity. In lieu of the annuity, a lump sum distribution may be offered.
- If the participant is married, the normal form is a joint and survivor annuity.
A cash balance plan is a type of defined benefit pension plan that looks like a defined contribution plan. Each participant’s benefit is expressed in the form of a (hypothetical) individual account. The accounts are credited annually with amounts specified in the plan document.
- Although contribution credits are specified in the plan document, actual contributions are determined actuarially.
- Contributions are not discretionary, as they are in a profit sharing plan, and they must be deposited within 8-1/2 months of the plan year end to avoid penalty.
- When a distribution is payable upon termination or retirement, the normal form of benefit is a monthly annuity. In lieu of the annuity, the participant may elect a lump sum distribution.
- If the participant is married, a joint and survivor annuity option must also be offered and the spouse must consent to any optional form of payment, including a lump sum.
Disclosures
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank Deposit
Prior to 2020, you were required to start taking Required Minimum Distributions (RMDs) by April 1 of the year following the year in which you attained age 70 ½. That rule still applies if you attained age 70½ by the end of 2019. Once you are required to begin taking RMDs, you must continue. For 2020, the SECURE Act increased the age to begin RMDs to age 72 and then subsequently with the passing of SECURE Act 2.0 beginning in 2023, the age has been raised again. The schedule below outlines at what age you must begin taking RMDs.
Date of birth before 7/1/1949, RMD starts at age 70 ½. Date of birth 7/1/1949 to 12/31/1950, RMD starts at age 72. Date of birth 1/1/1951 to 12/31/1959, RMD starts at age 73. After 12/31/1958, RMD starts at age 75.
The same April 1 deadline applies. Thereafter, you must take RMDs annually on or before December 31. Note, two required distributions will be issued your first year if you wait until the period January 1 to April 1 to begin your RMDs. You may avoid two taxable distributions in the first year by taking your first withdrawal on or before December 31 of the year in which you attain the applicable age as shown above.
However, if you are still working, you are not required to begin RMDs from your employer sponsored plan until April 1 of the year following the year in which you terminate employment. This exception does not apply if you own more than 5% of the employer, nor does it apply to IRAs.
a. $23,000 for 2024;
b. the maximum deferral amount allowed under the terms of the plan; or
c. the amount that allows the plan to meet the required nondiscrimination tests.
In addition, if you attain age 50 or older by December 31, you may defer an additional $7,500 catch up contribution.
