Background

• A defined-benefit plan is the traditional pension plan that a large part of the two previous generations received from their employers. At retirement, employees who worked for a company for 30 years or so received checks every month for the rest of their lives. With some plans, upon the worker's death, his widow would receive checks for the rest of her life, too.
  
  These plans have evolved into various forms, but what makes a pension plan a defined-benefit plan is that a formula specifies the benefit at retirement age.
  
  

Significance

• For a plan to be covered by ERISA, it must meet a host of conditions that range from the types of employees who may participate to the contribution limits. When the plan is created, it must go through a certification process and then be recertified each year to maintain qualified status. The annual process to recertify the plan as qualified is called testing, and a tax return for the plan (Form 5500) may be required.
  
  

Current Limits

• Defined-benefit plans have much higher limits than defined-contribution plans. Almost exclusively, 100 percent of the contributions into the plan come from the employer, and your pension annuity at age 65 is defined by the terms of the plan. For that reason, employers retain control of the funds, unlike 401(k) plans. However, instead of the 401(k) limit of $49,000, you were allowed to accrue benefits of up to $195,000 in 2009.
  
  

Types

• There are typically two types of defined-benefits plans: traditional and cash balance. A traditional plan is one in which your benefit is represented as a certain dollar amount per month for life, beginning at retirement. A cash balance is represented as a account balance, like a 401(k), even though it's a defined-benefit pension.
  
  

Considerations

• Defined-benefits pension plans are valuable benefits provided by employers, because you don't have any investment risk. Your employer has to worry about the investments because your benefit is set.