A blog post

A NEW RETIREMENT PLAN FOR 2010

Posted on the 18 January, 2010 at 10:28 pm Written by in Taxes

Starting in 2010, there is a new type of retirement plan on the block. It is called the DB(k), and the law authorizing it passed Congress several years ago.

The 2006 Pension Protection Act allows for businesses with 500 employees or fewer to offer the DB(k). It is supposed to combine features of a pension with those of a 401(k):

  •  A defined benefit equal to 1% of final average pay for each year of employee service, up to 20 years
  • Automatic enrollment for the (k) portion. Unless an employee opts out or changes the contribution amount, 4% of pay is automatically contributed the (k) 
  • There is a 50% employer match to the (k), up to a maximum match of 2% of pay

Companies will establish a pension fund sufficient to pay a worker in retirement up to 20% of average annual pay during the last few years of work. An employee vests in the pension after three years. Their balance in this account would be paid monthly at retirement, just like a traditional pension plan. This is the “defined benefit” (DB) part of the plan.

Alongside the DB part, the company will automatically take 4% of an employee’s pay and put it in a 401(k) plan. The company must match 50% of that amount, up to 2% of pay. These amounts are immediately vested. A worker can set aside less than 4% or opt out altogether. At retirement, the worker can withdraw funds from the (k) side to supplement the pension (DB) payments.

Who pays for this? The employer must completely fund the pension part. The employee must fund the withholding part of the (k), and the employer must fund the match.

To induce employers to offer these plans Congress has exempted them from the “top heavy” rules. These rules are used to ensure that a company’s retirement plans are not unfairly skewed toward higher-paid workers.

What is the reason for this? Congress wanted to introduce a tax incentive for smaller companies to implement pension plans, which have become increasingly scarce outside of a union or government-as-employer situation. The DB part of the plan allows for a predictable monthly cash payment during retirement. The (k) side would fluctuate with the market.

Given the stock market’s roller coaster performance in recent years, the DB(k) could well be a desirable employee benefit.