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February 15, 2009

Target Benefit Plan

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Definition

A target benefit plan is a defined contribution plan which includes some characteristics of a defined benefit plan and some characteristics of a money purchase pension plan.

Defined benefit feature
Contributions are based on a formula that uses some of the factors used for calculating contributions to defined benefit plans- typically the flat benefit or unit credit formula. However, unlike a defined benefit plan where benefits are usually definitely determinable (e.g. a monthly pension of x% of compensation for life, starting at retirement), benefits are based on contributions to the plan and earnings/losses.

Money purchase pension feature
Similar to a money purchase pension plan, contributions are mandatory, they are made to individual accounts, limited to IRC § 415(c), which is $45,000 for 2007, and benefits are the balances remaining from contributions, and earnings/losses.

Referring Cite

IRC§401(a), Treas. Reg. §§1.401(a)(4)-8(a), 1.401(a)(4)-8(b), 1.401(a)(4)-12

Additional Helpful Information

Target benefit plans are ideally suited for employers that wants to skew contributions in favor of older employees and wants to offer some of the features of a defined benefit plan without being subject to guaranteeing benefits and paying PBGC insurance premiums

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