A target benefit pension plan has features of both a money purchase plan and a defined benefit plan. As in a defined benefit plan a target benefit is determined and an annual calculation is made which will provide for a dollar sum equivalent to the target benefit.
At this point individual accounts are established for each participant. These accounts are credited with the annual contribution plus investment gain and less investment losses.
The participantís contribution is based on both age and wage. As such the older employee will receive a greater contribution than a younger employee even though both make the same wage. This type of plan produces a similar allocation to the comparability profit sharing plan, but has required contributions.
Unlike a defined benefit plan there is a maximum amount which can be allocated to any participant. This amount is the lesser of $53,000 or 100% of compensation.