Defined Benefit Plans
Defined Benefit Plans have a benefit formula stated in the plan document. The participants accrue benefits according to the stated formula. Defined Benefit plans are subject to minimum contribution requirements each year. By law, Defined Benefit Plans are required to utilize the services of an Enrolled Actuary to certify their funded status each year and sign the actuarial report.
Cash Balance Plans
A Cash Balance Plan is a defined benefit plan which mimics many features of defined contribution plans. Each participant has a "hypothetical account balance" which is credited each each with interest, at a rate defined by the plan, plus either a fixed dollar amount or a percentage of the employee's annual pay. This makes it easy to understand and as a consequence these plans have become very popular in recent years.
In a traditional pension plan, each participant's benefit is defined by a formula stated in the plan document, such as a percentage of their average pay over their career, or a certain dollar amount per year of service. These benefits are payable monthly beginning at retirement and continuing over the individual's lifetime, or the joint lifetimes of the individual and their spouse.
A Floor-Offset is a combination of a Defined Benefit Plan (which can be either a traditional or cash balance plan) and a Defined Contribution Plan. The benefits accrue in the defined benefit plan according to the formula in the plan document, but are reduced by the amount of an equivalent benefit derived from the participant's account in the defined contribution plan. These plans are more complex to administer but can be the right choice for certain plan sponsors.