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A New Combination Plan
Did you know that The Pension Protection Act of 2006 will provide for a new kind of hybrid pension plan for employers with 500 or fewer employees?
What it is – How it works
According to PensionRights.org, until now, employee contributions to traditional pension plans have not been tax deferred. For that reason, few pension plans require or permit employee contributions. Instead, many employers supplement their pension plans with separate 401(k) plans which permit employees to defer taxes on their contributions.
The DB/K Plan
The new “DB/K plan” will combine a traditional defined benefit pension plan with a 401(k) savings plan. The plan will provide a low employer-paid guaranteed lifetime monthly retirement benefit that could be supplemented by voluntary tax deferred contributions by employees. The minimum pension benefit, payable to employees who work 3 or more years for the employer, will be equal to the lesser of 1 percent of average pay during the last five years of work multiplied by the number of years of service with the employer, or 20 percent of the average pay in the employee’s consecutive highest 5 years of earnings.
Assessment
The 401(k) component of the plan requires the employer to match at least 50% of an employee’s contributions up to 4% of the employee’s salary. The provision will take effect in 2010.
Read Section 903 of The Pension Protection Act of 2006 Public Law 109-280
Visit: www.PensionRights.org
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Filed under: "Advisors Only", Financial Planning, Retirement and Benefits | Tagged: DB[k] plan, Pension Protection Act 2006, retirement planning | 3 Comments »
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