Page 182 - Group Insurance and Retirement Benefit IC 83 E- Book

funding as a financial risk they can avoid by freezing the plan and instead offering a

defined contribution plan.

Examples of Defined contribution plan include Individual Retirement

Account (IRA), 401(k), and profit sharing plans. In such plans, the participant is
responsible for selecting the types of investments toward which the funds in the

retirement plan are allocated. This may range from choosing one of a small number of
pre-determined mutual funds to selecting individual stocks or other securities. Most self-

directed retirement plans are characterized by certain tax advantages. The funds in such
plans may not be withdrawn without penalty until the investor reaches retirement age,

which is typically 59.5 years of age.

Money contributed can be from employee salary deferrals, employer contributions, or

employer matching contributions. Defined contribution plan are subject to IRS section

415 limits on how much can be contributed. As of 2012, the total deferral amount
including the employee and employer contribution is the lesser of $50,000 or 100% of

compensation. The employee-only amount is $17,000 for 2012, but a plan can permit
participants who are age 50 or older to make "catch-up" contributions of up to an

additional $5,500.

Defined benefit plans

Commonly referred to as a pension in the US, a defined benefit plan pays benefits from a

trust fund using a specific formula set forth by the plan sponsor. In other words, the

plandefines a benefit that will be paid upon retirement. The statutory definition of defined
benefit encompasses all pension plans that are not defined contribution and therefore do

not have individual accounts.

While this catch-all definition has been interpreted by the courts to capture some hybrid

pension plans like cash balance (CB) plans and pension equity plans (PEP), most pension
plans offered by large businesses or government agencies are final average pay (FAP)

plans, under which the monthly benefit is equal to the number of years worked multiplied
by the member's salary at retirement multiplied by a factor known as the accrual rate. At

a minimum, benefits are payable in normal form as a Single Life Annuity (SLA) for

single participants or as a Qualified Joint and Survivor Annuity (QJSA) for married