It seem like every day we learn about another company that is freezing or terminating its defined benefit pension plan. And it’s not just the troubled automakers, airlines and steelmakers. It’s also healthy companies such as Verizon and IBM who have also moved to reduce or eliminate their pension plans as they shift more of the responsibility to employees through 401(k) plans.
Indeed, the number of active, private-sector workers covered by defined benefit plans has been on the decline for several years. The number of PBGC-insured plans peaked at more than 114,000 in 1985, declining to 31,238 in 2004, according to the Employee Benefit Research Institute.
But defined benefit pension plans are on the rise for a certain segment of the business community – small businesses. Defined benefit pension plan appeal to those business owners who have not saved enough for retirement or want larger tax deductions than those available through a profit sharing plan.
Recent tax law changes have encouraged the adoption of defined benefit pension plans by small businesses:
- In 2006 the limit for an annual benefit increases to as much as $170,000.
- A pre-retirement benefit funded through life insurance may be part of the plan design (not new, but rediscovered).
- The deductible contribution can far exceed that for a profit sharing contribution.
- The business owner may be able to contribute up to $15,000 to a 401(k) plan plus $5,000 catch-up if age 50 or older in addition to the pension plan contribution.
Who should adopt a defined benefit pension plan? No pat answer since it depends on the facts and circumstances of each employer. In future posts I’ll be addressing a more appropriate question, “What type of retirement plan is right for you?”