Defined-Benefit pension plans pay fixed retirement benefits. These benefits are based on a formula written in your plan. The formula may direct that employees be paid a percentage of their average compensation over a particular number of years (i.e. the last three years of employment) or it may call for a flat monthly payment based on months or years of service.
Once you've come up with a benefit formula, you have to contribute whatever amount is necessary each year to fund your employee's retirement benefit. Since your contributions depend on several variables - employee's ages, compensation, life expectancy, plan turnover rates, and projected plan earnings - pension law requires you to consult an actuary to determine your yearly contributions. If you want to contribute more than the minimum amount, the actuary will tell you how much more you are permitted to contribute.
Companies that have been in business for some time but do not have a qualified retirement plan may find defined-benefit plans particularly attractive. By taking into account years of service prior to establishment of the plan, you can provide long-term employees who are close to retirement age with significant retirement benefits.
