Page 183 - Group Insurance and Retirement Benefit IC 83 E- Book

participants. Both normal forms are paid at Normal Retirement Age (usually 65) and may

be actuarially adjusted for early or late commencement. Other optional forms of payment,
such as lump sum distributions, may be available but are not required.

The cash balance plan typically offers a lump sum at and often before normal retirement
age. However, as is the case with all defined benefit plans, a cash balance plan must also

provide the option of receiving the benefit as a life annuity. The amount of the annuity
benefit must be definitely determinable as per IRS regulation 1.412-1.

Defined benefit plans may be either funded or unfunded. In a funded plan, contributions
from the employer and participants are invested into a trust fund dedicated solely to

paying benefits to retirees under a given plan. The future returns on the investments and
the future benefits to be paid are not known in advance, so there is no guarantee that a

given level of contributions will meet future obligations. Therefore, fund assets and

liabilities are regularly reviewed by an actuary in a process known as valuation. A
defined benefit plan is required to maintain adequate funding if it is to remain qualified.

In an unfunded plan, no funds are set aside for the specific purpose of paying benefits.
The benefits to be paid are met immediately by contributions to the plan or by general

assets. Most government-run retirement plans, including Social Security, are unfunded,
with benefits being paid directly out of current taxes and Social Security contributions.

Mostnon qualified plans are also unfunded.

Hybrid and Cash Balance Plans

Hybrid plan designs combine the features of defined benefit and defined contribution

plan designs. In general, they are treated as defined benefit plans for tax, accounting, and

regulatory purposes. As with defined benefit plans, investment risk is largely borne by
the plan sponsor. As with defined contribution designs, plan benefits are expressed in the

terms of a notional account balance, and are usually paid as cash balances upon
termination of employment. These features make them more portable than traditional

defined benefit plans and perhaps more attractive to a highly mobile workforce. A typical
hybrid design is the Cash Balance Plan, where the employee's notional account balance

grows by some defined rate of interest and annual employer contribution.