DB(k) Plan - Explained
What is a DB(k) Plan?
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What is a DB(k) Plan?
The DB(k) plan is a conglomeration of the features of the 401(k) plan and the qualities of the defined benefit (DB) plan. It is a special type of retirement plan for employers. The DB(k) plan allows a company or an employer to set aside funds that can be contributed into the account. The DB(k) plan was enacted by the congress as part of the Pension Protection Act of 2006. Section 414(x) of the Internal Revenue Code also contains the provisions of this hybrid plan.
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How Does a DB(k) Plan Work?
An organization that has a concrete retirement plan or pension plan attract employees, especially valuing-adding employees. No one wants to want in an organization without any guarantee that after-work life is secured. The DB(k) plan was signed into law on January 1, 2010. As a peculiar type of pension plan or retirement plan, the DB(k) plan was drafted for emerging businesses. A business with a minimum of two employees and less than 400 employees can make voluntary contributions into the DB(k) plan. The DB(k) plan has the characteristics of defined benefit plan and the 401(k) plan, this means that after retirement, employees are still entitled to a stream of income. The DB(k) plan is a combination of the features of a 401(k) Plan and a defined benefit plan. Here are the components of both plans: Features of 401 (k);
- An auto-enrollment contribution rate for this plan is 4%. It can only be minimized if the employee chooses to reduce the rate or opts out of the plan.
- 50% of the contributions must be matched by an employer. The limit of match is 2% or up to 4% as compensation.
- The matching contribution must be vested in the entitles employees.
Features of Defined benefit (DB) plan;
- An employer is required to make a contribution of at least 1% of pay every year.
- Employees are entitled to this payment but the maximum amount must cover 20 years.
- The benefits of the (DB) plan are only bestowed on employees 30 years after meritorious service with the organization.
Limitations of the DB(k) Plan
Despite that the DB(k) plan sounds like a laudable plan, it has certain limitations as a practice than when in theory. Here are the major limitations of the DB(k) plan;
- It is expensive to run, especially for small business employers.
- Growing contributions in the plan has been seemingly slow.
- Setting up a DB(k) is a rigorous process, hence, employers shy away from using it.
- The Internal Revenue Service imposed strict regulations on the DB(k) plan and this is why it is rarely used by employers.
- An employer that wants to set up this plan is required to file two distinct 5300 Forms for each part of the plan, the 401 (k) and defined benefit (DB) plan respectively.
- Each component requires separate administration cost.
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