Quick Answer
A defined benefit plan promises a specific retirement benefit calculated by formula, usually from salary history and years of service. The employer bears all investment risk and must contribute whatever an actuary says is needed to fund that promise. The Pension Benefit Guaranty Corporation (PBGC) insures the benefit if the plan cannot pay.
Now that you understand the qualified vs. non-qualified framework, let's look at the first major type of qualified plan: the traditional pension.
How Does a Defined Benefit Plan Work?
- Promises a specific retirement benefit based on a formula (typically salary history and years of service)
- The employer bears the investment risk; if plan investments underperform, the employer must increase contributions to fund the promised benefit
- Contributions are determined by actuarial calculations, not a fixed dollar amount
- The employee's benefit is fixed regardless of market performance
- Employees do not direct investments; the plan's trustees manage the portfolio
What Are the Key 2026 Features?
- Maximum annual benefit (2026): $290,000 or 100% of average compensation for the highest 3 consecutive years, whichever is less
- Employer contributions are mandatory and must be actuarially sufficient
- Vesting schedule applies to employer contributions
- Employees are always 100% vested in their own contributions
- Benefits are insured (up to limits) by the Pension Benefit Guaranty Corporation (PBGC)
Exam Tip: Gotchas
- "Actuarially determined" means there is no fixed contribution amount. The employer contributes whatever is needed to fund the promised benefit; this amount changes year to year.
- Employees in a defined benefit plan do not choose their investments. Plan trustees manage the portfolio, not individual participants.
What Does the PBGC Insure?
The Pension Benefit Guaranty Corporation is a federal agency that protects participants in private-sector defined benefit plans:
- If a plan is terminated without enough assets to pay benefits, the PBGC steps in
- Covers single-employer and multiemployer plans
- Funded by insurance premiums paid by sponsors of defined benefit plans
- Does not cover defined contribution plans (401(k), 403(b), etc.)
- Does not cover government or church plans
Exam Tip: Gotchas
- The PBGC only insures defined benefit plans, not defined contribution plans. Do not confuse the two; 401(k) and 403(b) plans have no PBGC backstop.
- In a defined benefit plan, the employer bears all investment risk. If the plan's investments underperform, the employer must increase contributions. The employee's benefit is fixed. This is the opposite of a defined contribution plan, where the employee bears the risk.
How Is a Married Participant's Benefit Paid Out?
A married, vested participant's benefit defaults to a qualified joint and survivor annuity (QJSA) under ERISA. This applies to every defined benefit plan and to money purchase pension plans (a defined contribution plan type covered later in this unit):
- Pays the participant for life, then continues a survivor annuity to the spouse of at least 50% (and no more than 100%) of the joint-life amount
- If the participant dies before payments start, a qualified preretirement survivor annuity (QPSA) goes to the surviving spouse instead
- Waiving the QJSA for a different payout form (such as a lump sum or single-life annuity) requires written, witnessed spousal consent
- The plan must give the participant a written explanation of the QJSA/QPSA and the right to waive them before the annuity starting date
Exam Tip: Gotchas
- A married participant cannot unilaterally elect a different distribution form. The QJSA is the default; changing it requires the spouse's written consent, witnessed by a plan representative or notary public.
Defined Benefit vs. Defined Contribution: Quick Preview
| Feature | Defined Benefit | Defined Contribution |
|---|---|---|
| What's defined | The retirement benefit | The contribution amount |
| Investment risk | Employer | Employee |
| Individual accounts | No | Yes |
| PBGC insurance | Yes | No |
| Contribution determined by | Actuary | Formula or election |
What Should You Check on Exam Day?
- Confirmed who bears the investment risk: employer for defined benefit, employee for defined contribution.
- Remembered the PBGC insures defined benefit plans only, never 401(k)/403(b), government, or church plans.
- Recalled that "actuarially determined" means the contribution amount changes every year, not a fixed dollar figure.
- Checked the 2026 maximum annual benefit ($290,000, or 100% of the top-3-year average compensation, whichever is less).
- Remembered a married participant's default distribution is the QJSA, and that waiving it requires written, witnessed spousal consent.