Under the
target benefit plan, calculation of the employer's contribution takes into consideration not only the participant's compensation but also the participant's age when first entering the plan.
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.
But in a
target benefit plan, the contribution, once made, is allocated to separate accounts maintained for each participant.
In the case of a
target benefit plan, regardless of the actual fund earnings, the level contribution to the account does not change.
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.
The
target benefit plan is a money purchase plan where the contributions are age-weighted.
The agency explains that MPP and
target benefit plans are subject to the minimum funding standards of Internal Revenue Code (IRC) Section 412.
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.
Money purchase and
target benefit plans are then discussed, followed by profit sharing, stock bonuses, employee stock option plans (ESOP), and 401(k) 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.
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).