There are two types of pension plans:
1. Defined Benefit Plan (or) qualified benefit plan
2. Defined Contribution Plan (or) non-qualified benefit plan
Defined Benefit Plan :An employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how you can withdraw these funds without penalties.
This fund is different from many pension funds where payouts are somewhat dependent on the return of the invested funds. Therefore, employers will need to dip into the companies earnings in the event that the returns from the investments devoted to funding the employee's retirement result in a funding shortfall. The payouts made to retiring employees participating in defined-benefit plans are determined by more personalized factors, like length of employment.
A tax-qualified benefit plan, shares the same characteristics of a defined-benefit plan, but also provides the beneficiary of the plan with added tax incentives. These tax incentives are not realized under non-qualified plans.
Defined Contribution Plan :A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. But,There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed is fixed, but the benefit is not.
