What is a 'DB(k) Plan'

A DB(k) plan is a hybrid retirement plan that combines some of the characteristics of a defined contribution 401(k) plan with those of a defined benefit (DB) plan. Funds can be voluntarily contributed to the DB(k) plan just as they can with a 401(k) plan, with the employer retaining the option to match the funds up to a certain percentage. Upon retirement, the employer will also pay the employee a small percentage of his or her salary, which is similar to a traditional pension. 

The DB(k) Plan has the official name of the Eligible Combined Plan and was created by Congress as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

BREAKING DOWN 'DB(k) Plan'

The DB(k) plan was initially designed to provide small businesses especially, defined as businesses with at least two employees but less than 400, with a way to attract employees, since many investors worry that their entire savings could be wiped out in a down market. Retaining the pension characteristic means that the retiree will still have a source of income, regardless of the performance of the 401(k) portion of the plan. Because the DB(k) Plan combines both a defined benefit component and a 401(k) component, there are some specifications for each category.

Defined Benefit Component:

  • The employee is required to receive at least 1 percent of pay for each year of service, but the total amount cannot exceed 20 years.
  • Benefits are vested after 30 years of services.

 401(k) Component:

  • There must be an auto-enrollment provision with a 4% contribution rate unless the employee elects to reduce this rate or opt-out.
  • The employer must match 50% of the employee’s 401(k) contributions, up to 4% of compensation, or a 2% maximum match.
  • Employees must be fully vested in the matching contribution when made.

Limitations of the DB(k) Plan

Although the DB(k) Plan sounds like a good idea in theory, its practical application has faced some challenges. Since being signed into law on January 1, 2010, DB(k) plans have actually been slow to grow. DB(k) plans lack of popularity may be due to the strict IRS application requirements for the plan’s designation. For instance, in order to set up a DB(k) Plan, an employer is required to file quite a bit of paperwork, including two separate Form 5300s for each component of the plan, which also means paying two fees for each separate component within the account. The accounts are also too costly for many small business employers to run, since they essentially double the amount of work required for one retirement plan, as each plan requires separate administration.

RELATED TERMS
  1. Qualified Retirement Plan

    Your employer might offer one or more qualified retirement plans, ...
  2. Active Participant Status

    Active-participant status is a reference to an individual's participation ...
  3. Past Service

    Past service encompasses the period before an employee participated ...
  4. Defined-Benefit Plan

    A defined-benefit plan is an employer-sponsored retirement plan ...
  5. Target-Benefit Plan

    A target-benefit plan is one wherein retirement benefits are ...
  6. Variable Benefit Plan

    A variable-benefit plan is form of retirement savings in which ...
Related Articles
  1. Retirement

    How Can You Make the Most of Your 401(k)?

    Make the most of your 401(k) plan by contributing early and taking advantage of employer matches.
  2. Retirement

    401(k) Investing for Military Veterans

    Military personnel have access to a thrift savings plan, which is similar to a 401(k) plan.
  3. Retirement

    The Basics of a 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Here's why.
  4. Retirement

    3 401(k)s With the Lowest Expense Ratios

    Discover how to Identify the fees and expenses associated with 401k investing and how it will affect your bottom line in investing.
  5. Retirement

    10 Providers With 401(k) Plans for Small Employers

    If you're a small business that has steered clear of a 401(k) plan for your employees, find out how these providers can make it easier.
  6. Retirement

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  7. Retirement

    5 Companies With the Best Retirement Plans

    Ever wonder how your company retirement plan stacks up against the country's best employers? Take a peek at these great retirement plans.
  8. Retirement

    Why You Shouldn't Bet on Defined Benefit Plans

    Defined benefit plans were once a easy, safe way for workers to save for retirement. Too bad their massive obligations have made them expendable.
  9. Financial Advisor

    Who Wants to be a 401(k) Millionaire? (TROW)

    Want to be a 401(k) millionaire? Here are some tips to get you on the right path.
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center