how the unit benefit formula works
a unit benefit plan is an employer sponsored pension plan that provides retirement benefits based on a dollar amount or more typically a percentage of the employee s earnings for each year of service the unit benefit formula means the company pays a percentage of the employee s salary for each year of service a unit benefit plan is usually based on a percentage ranging from 1 25 to 2 5 when the employee retires their years of service are multiplied by the percentage multiplied by the career average salary to determine the employee s annual retirement benefit an advantage of a retirement plan that uses a unit benefit formula is that employees are compensated for working longer at a company however the unit benefit method requires the services of an actuary and in turn higher associated costs for the employer defined benefit plana defined benefit plan is an employer sponsored retirement plan where employee benefits are computed using a formula that considers several factors such as length of employment and salary history the company administers portfolio management and investment risk for the plan there are also restrictions on when and by what method an employee can withdraw funds without penalties 1defined benefit plans which include pension plans or qualified benefit plans are termed defined because employees and employers know the formula for calculating retirement benefits ahead of time this fund is different from other pension funds where the payout amounts depend on investment returns if poor returns result in a funding shortfall employers must tap into the company s earnings to make up the difference because the employer is responsible for making investment decisions and managing the plan s investments the employer assumes all the investment risk a tax qualified benefit plan has the same characteristics as a pension plan but it also gives the employer and beneficiaries additional tax incentives not available under non qualified plans qualified retirement plana qualified retirement plan meets the requirements of internal revenue code section 401a and so it s eligible to receive certain tax benefits such a retirement plan is established by an employer for the benefit of the company s employees 2qualified retirement plans give employers a tax break for the contributions they make for their employees qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees present income tax liability by reducing taxable income 2 qualified retirement plans can help employers attract and retain employees the internal revenue service irs has established annual contribution limits for employees enrolled in qualified plans such as 401 k s for 2024 the maximum contribution limit for a 401 k is 23 000 if an employee is aged 50 or older they can make an additional catch up contribution of 7 500 3the irs has also established annual limits for total contributions from both the employee and employer to a defined contribution retirement plan for 2024 the total annual contributions to an employee s account cannot exceed 69 000 or 76 500 including catch up contributions 4