Under this retirement plan, the employer is the one responsible to pay up all the benefits in the plan and promises a set payout when an employee retires. Unless required under specific agreements, the employee does not contribute to their retirement plans. The amount of the plan is usually set in advance according to the agreed formula. The amount paid under this plan directly resembles the percentage of the employee’s salary multiplied by the number of years of service outlined in the retirement plan (Internal Revenue Service, 2019). The risks under this plan are assumed by the employer. This is an implication that the employer bears all the uncertainties placing them at risk. This retirement plan provides employees with more resources at the end of employment. This is because all the risks are assumed by the employer and it does not depend on how an employee will contribute and invest. Furthermore, the returns on investments are not predictable making this plan more resourceful to the employee. Taxes for an individual employee can be paid once or decide to pay when they start getting distributions from their plans.
Defined-contribution Retirement Plan
Unlike the defined-benefit plan, this retirement plan requires the employee to contribute while the employer matches a certain amount of contribution. The amount of retirement pay depends on the total accrued in the employee’s account. The employee is, therefore obliged to contribute and invest enough assets for their retirement. As compared to the defined-benefit plan, the fluctuations-related risks are assumed by the employee (Tax Policy Centre, 2016). Under this retirement plan, the responsibilities of the employers are limited to the contribution that they must pay based on the plan’s provision. This plan is more risky for an individual employee because they bear all the risks, and are responsible for the amount of the retirement. Under this plan, an individual employee does not pay tax on first contributions or accrued plan earnings. The taxes are only paid when they withdraw the funds.
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References
Internal Revenue Service. (2019). Choosing a retirement plan: defined benefit plan. Retrieved from https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined-benefit-plan .
Tax Policy Centre. (2016). Key elements of the U.S. tax system. Retrieved from https://www.taxpolicycenter.org/briefing-book/what-are-defined-contribution-retirement-plans .
