A defined benefit plan is one that promises employees a specific pension accrual amount based on age and service. A defined benefit plan is a pension plan usually funded entirely by employer contributions. The employee will receive a pension defined by a formula upon reaching a specified age. Once the employee reaches the specified age, the plan "vests" and the benefits due to the employee may not be reduced. Defined benefit plans are, in most cases, guaranteed by the Pension Benefit Guarantee Corporation ("PBGC") which pay out pension benefits should an employer’s defined benefit plan become insolvent. Therefore, with a defined benefit plan, the employer bears the investment risk and reward as all fund contributions are pooled.
Federal law applies to employers who choose to offer pension plans. For example, the Internal Revenue Code ("IRC") requires that pension plans be administered in particular ways in order to qualify for preferential tax treatment. The Employee Retirement Income Security Act ("ERISA") requires that the employer act as fiduciary with respect to plan administration and operate the plan solely for the benefit of the participants. The Age Discrimination in Employment Act ("ADEA") requires that employers not discriminate against employees based on age.
