Target-Benefit Plan

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Target-Benefit Plan

A pension plan with a defined contribution but no guaranteed payout. That is, when the annuitant purchases the plan, he/she makes a contribution each month according to a formula that is most likely to result in a certain payout when he/she begins receiving payments. The formula assumes a certain interest rate and/or market movements will take place. If these do not occur according to the formula's projections, the plan's operators are under no obligation to provide the projected payout. Instead, they provide what the contributions have actually earned over the life of the pension.
References in periodicals archive ?
The agency explains that MPP and target benefit plans are subject to the minimum funding standards of Internal Revenue Code (IRC) Section 412.
Compared to defined benefit plans and defined contribution pensions (i.e., money purchase and target benefit plans), profit sharing plans offer the flexibility of not having to make annual contributions, but age-weighted profit sharing plans offer the additional advantage of providing significantly larger allocations to older employees.
The regulations provide a safe harbor testing method for target benefit plans. Because target benefit plans are defined contribution plans that determine allocations based on a defined benefit funding approach, the safe harbor is included in the rules for cross testing.
Target benefit plans are much like money purchase plans, but the employer contribution percentage can be based on age at plan entry--higher for older entrants.
Note: Since target benefit plans are defined contribution plans they are subject to the limit on annual additions to a participant's account.
Money purchase and target benefit plans are then discussed, followed by profit sharing, stock bonuses, employee stock option plans (ESOP), and 401(k) plans.
Submitter Approved] Defined and Target Benefit Plans [Volume
Target benefit plans (see Q 384), where the actual pension is based on the amount in the participant's account, are to be treated as defined contribution plans.
Qualified retirement plans, both defined contribution plans (pension plans such as money purchase and target benefit plans, and profit sharing plans such as 401(k) plans and savings/thrift plans) and defined benefit plans (traditional defined benefit plans, cash balance plans, and 412(i) plans).
With the profit-sharing "budget" under IRC section 404 rising from 15% to 25% of eligible payroll, the old money purchase and target benefit plans are no longer necessary.
The Act eliminates the ability of defined contribution plans (other than certain target benefit plans) to satisfy the non-discrimination requirements by cross-testing on a benefits basis.
Under a target benefit plan, there are fixed contribution rates and targeted future pension benefits; however, the targeted amount is not guaranteed (Steele, 2016).