Objectives of this Presentation

One of our main motivations for preparing this paper is to provide a resource to the taxpayers and their advisors.  As we shall see, the current use of the traditional Defined Benefit Plan is almost exclusively driven by the income tax deferral incentive.  Large companies are shedding their traditional Defined Benefit Plans whenever possible to reduce fixed costs.  Unfortunately, the Pension Benefit Guarantee Corporation (PBGC) has inherited many of these plans through bankruptcies.  Others have been converted to the more popular and economical Cash Balance Plans.  The distinction of the Cash Balance Plan from the traditional Defined Benefit Plan will not be addressed in this paper.  Other Defined Benefit pension plans have been terminated if sufficiently funded under the current Internal Revenue Service (IRS) rules.

Is it any wonder, then, that a taxpayer feels uneasy when a Defined Benefit Plan is recommended for his use as a means of accumulating wealth in a tax-deferred environment for the purpose of obtaining personal financial independence?  Often he or his advisors have heard about the financial troubles of the PBGC and potential bailout by the taxpayers, or he may have a business colleague who terminated an under-funded Defined Benefit Plan for financial reasons during the 1980s, or even worse, he may have known someone whose Plan was subjected to the IRS’s audit of small Defined Benefit Plans during that same period.  Concerns about these troublesome events must be dispelled along with certain myths about Defined Benefit Plans; doing so is one of the objectives of this paper. Defined Benefit Plans are complicated with many different variations. Furthermore to add to the confusion there is great inconsistency among professionals concerning their mechanics.  This paper will attempt to erode some of the myths and give you  a better understanding and appreciation of the Defined Benefit Plan.

 

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