Defined Benefit Plan Explained: How DB Plans Work and Why Owners Use Them
Defined benefit plans promise a future benefit by formula. Owners use them to accelerate retirement savings — and to host 401(h) retiree medical sub-accounts.
Key takeaways
- DB plans promise a benefit defined by a formula.
- Employer funding is actuarial; investment risk sits with the employer.
- DB plans qualify to host 401(h) retiree medical sub-accounts.
- Cash balance plans are a form of DB plan.
Formula-based benefit
A DB plan promises a benefit defined by formula — often a percentage of final average pay, times years of service. The promise sits with the employer; the participant receives the benefit at retirement.
Actuarial funding
The employer funds the trust based on actuarial projections of the promised benefit stream, integrating investment-return and demographic assumptions. The actuary owns this work.
Risk and fiduciary care
Investment and longevity risks sit with the employer. Fiduciary duties under ERISA apply. The vehicle is more complex than a 401(k), but it carries more capacity.
401(h) hosting
DB plans qualify to host a 401(h) sub-account, allowing the same plan to formalize retiree medical benefits alongside the retirement benefit.
Frequently asked questions
Availability, tax treatment, and plan design depend on the facts and circumstances of the employer, plan document, participant group, and applicable law. 401h.com provides general educational information only — not tax, legal, actuarial, investment, or ERISA advice. Consult qualified tax, legal, actuarial, and plan professionals.
401h.com Editorial
401h.com
The 401h.com editorial team publishes plain-English explainers on 401(h) retiree medical benefit plans. Educational only — not tax, legal, actuarial, investment, or ERISA advice.
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