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Corporate Retirement Accounts: The Defined-Benefit Plan

In general, corporations must choose between four different types of employee retirement plans for their workers. These include qualified and nonqualified plans, as well as defined-contribution and defined-benefit plans. According to the IRS, the latter type of plan “provides a fixed, pre-established benefit for employees at retirement.”                                                                        

While employees often appreciate the certainty provided by defined-benefit plans, their employers like them because they allow them to “generally contribute (and therefore deduct) more [money] each year than with defined contribution plans.”                                        

Of course, some corporate decision-makers may have mixed thoughts about defined-benefit plans because their complexity can make them more costly to administer and maintain.

The following facts provide additional information about these plans, including their positive and negative attributes.

Information Concerning the Strengths and Weaknesses of Defined Benefit Plans

  • Early retirement may work well with this type of account. Even over a rather short period of time, you can accumulate “substantial benefits” under this kind of plan;

  • The vesting time period may be flexible. You can usually ask your employer if you can receive all of your  retirement funds in one payment – or possibly spread out over a period as long as seven years;

  • Asset returns are not as dependent on the “ups and downs” of Wall Street. Unlike those who have defined-contribution retirement accounts, this type of plan can provide greater security in the eyes of many employees;

  • Certain excise taxes may apply. If set minimum payments to such accounts aren’t met – or if the maximum amounts allowed are exceeded, excise taxes may have to be paid;

  • Employee contributions are not always mandatory. Ask your employer if you’re expected to contribute regularly – or if your personal contributions are voluntary. If this type of flexibility is included, it can prove very helpful during difficult times in your life;

  • Loans can sometimes be made against such accounts. Find out if you are allowed to borrow money from this account and what penalties may apply if you do. Also, ask how soon you must reimburse any borrowed amount(s);

  • Restrictions on “in-service withdrawals.” According to the IRS, you cannot make these before you reach age 62;

  • You will probably need the assistance of an enrolled actuary when preparing your annual taxes. One of these professionals must review and then sign Schedule B of your Form 5500.

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.

 


Shane Smith
Advocate for the Seriously Injured in Georgia