Retirement professionals will help fine-tune your plan
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.
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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.
Special Note: For 2020 the CARES Act temporarily suspended the RMD requirements from IRAs and qualified retirement plans provided the employer sponsoring the plan adopts the CARES Act provisions. Check with the sponsor of your retirement plan to confirm if you must take an RMD for 2020.
a. $19,500 for 2021;
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 $6,500 catch up contribution.