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Maxing Out Defined Benefit Plans

Course: Retirement Planning
Lesson 8: Fitting Deferred Compensation into the Retirement Plan

Student Question:

Curious as to why the net result is $525,000.00 and not $500,000.00. Wouldn’t 100% of her current year compensation be $500,000.00? Is it just that the Board decided to max out the limits of the DBP and the NQEBP so that’s where the $525,000.00 figure came from?

Thanks.

Paul

Example – Excess Benefit Plan 

XYZ Corp. sponsors a Defined Benefit Plan. Patti is the CEO, earns $500,000 annually, and the Board of Directors wishes to provide her with an annual retirement benefit of 100% of her current year compensation. 

The maximum benefit payable to Patti from the qualified Defined Benefit Plan is $225,000 (2019).

The solution? A Nonqualified Excess Benefit Plan may be adopted and an annual retirement benefit of $300,000 could be provided to Patti. 

The net result is that Patti will receive $525,000 annually in retirement from a combination of the Qualified Defined Benefit Plan and the Nonqualified Excess Benefit Plan.


Instructor Response:

Hey Paul-

Great to hear from you. So, yes – as you allude to, they are attempting to max out the benefit. So, how do we arrive at $525,000? It would be the $225,000 as the maximum benefit payable from the qualified defined benefit plan plus the $300,000 from the nonqualified excess benefit plan. That gives us the maximum benefit of $525,000.

Let me know if you have any further questions!

Dan