Know Definition, Examples, Limits & Scheme Features Defined Benefit Plan

A defined benefit plan is a type of pension plan in which a plan sponsor promises a specified monthly benefit upon attainment of the Plan’s Normal Retirement Age. This benefit is predetermined on a formula basis, using the employee’s earnings history, tenure of service, and age. It is not affected by the Plan’s investment returns.

In short, this type of Plan defines the benefit or the amount of money to be received each month by the participant. This “monthly defined benefit” can be as high as 100% of the participant’s highest consecutive 3-year average monthly compensation based on years of service with the company. Such an amount is limited by a dollar limit established under IRS regulations. For 2019 the annual dollar limit is $225,000 or $18,750 on a monthly basis for retirement age 62 through 65. Such an amount is reduced for less than 10 years of participation in the plan. For retirement ages above age 65, the dollar limit is increased according to IRS regulations. This dollar amount is further reduced if participation in the plan is less than 10 years. You can use our defined benefit calculator to calculate how much you can contribute to the plan in the first year.

For more information, check out our Comprehensive Guide to Defined Benefit Plan.