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Deficit Plan Advantages And Disadvantages

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According to the book defined benefit (DB) versus defined contribution (DC) plans both have their advantages and disadvantages. For a DB the advantages include guaranteed/insured pension plans, allows maximum contributions to be made for the pension, and early retirement is allowed/encouraged to allow the pension to keep a stable balance while still paying annual benefits. As for disadvantages, DBs tend to be complex in operation and design, the employer assumes the risk of the investment plan, and DBs tend to be expensive to administer. The advantages of DCs include the following; easy to administer, easy to transfer to an annuity or IRA away from the employer, and equal contributions are made based on a percentage of salary rather than tenure …show more content…

The benefit amount is determined by a formula that considers factors such as the employee's salary history and length of service. The employer typically assumes the investment risk and is responsible for ensuring sufficient assets in the plan to pay the promised benefits. A DC, on the other hand, is a retirement plan where the employer and employee both contribute a set amount to an individual account. The employee assumes the investment risk and responsibility for the growth of the account …show more content…

Qualified plans do not subject the employer to taxes before payroll, in addition, the employee does not pay income tax before the contribution is made. This allows for a larger contribution and fewer taxes to be levied on the actual income. For nonqualified plans, the book states tax deductions can be postponed by the employer and possibly deferral of tax by the employee. This is a tax advantage for highly compensated employees and businesses as the contributions can be highly flexible and moved into other benefit packages. This is a huge tax advantage depending on the benefits package as taxes can be manipulated depending on what plan is

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