Can anyone explain to me the difference between a (1) unit benefit, (2

[Guest slt]

Can anyone explain to me the difference between a (1) unit benefit, (2) fixed benefit and a (3) flat benefit? I am trying to fill out a Form 5300 and I do not know which to put down. Thanks so much!

[david rigby]

Defined benefit plan formulas fall into two basic categories: fixed and variable. Two types of fixed formulas are:

A unit benefit formula accrues an explicit unit of benefit for each year of service. The unit may be expressed as a percent of comp or as a dollar amount.

A flat benefit formula provides a benefit that is unrelated to service, although there may be some minimum service requirement.

Variable formulas are less common and include the use of variable annuities or some other mechanism whose goal is to "protect" the purchasing power of the benefit.

[MGB]

I have asked this question repeatedly for over 20 years and have repeatedly gotten different answers depending on who I ask. The only "insight" I've ever gotten was from an ex-IRS employee that claimed that "flat benefit" is referring to a formula such as 50% of final pay, no matter what the service at NRA. Of course, this design has gone through so many changes since the nondiscrimination rules under TRA'86 that the description on the 5500 no longer makes sense.

Unit benefit is the opposite: e.g., 2% of final pay times years of service.

I presume the fixed benefit is a dollars-per-year type plan such as $20 per year of service (but I'd also consider this a unit benefit).

For most plan designs nowadays, I can't imagine trying to figure out which of these categories various designs fit into. They need a category called "none of the above."

[Guest slt]

Thank you Pax. Just for clarification, it appears from what you are saying - a benefit formula could be both a unit benefit and a fixed benefit formula. (since unit is a subset of fixed). Is it more common to just put down "unit benefit" on the Form 5300? (The benefit in my plan is based on YOS and a % of comp). Or should I put down both? Thanks!

[david rigby]

My understanding of the terminology is that "unit" is the correct answer for your situation. However, it may be possible that your form asks two questions: fixed or variable? then unit or flat?

FYI, the source for my description above is found in chapter 5 of Fundamentals of Private Pension Plans, written by Dan McGill and Donald Grubbs, published by the Pension Research Council. (I have a copy of the sixth edition.)

BTW, this book is an excellent resource.

[Guest slt]

Thank you both for your very helpful replies. I looked at the revised Form 5300 and it appears to do away with this archaic classification system. (It has a "defined benefit but not cash balance" classification and a "target benefit" classification - I'm not sure what the latter is). It also has a cash balance classification.

Unfortunately, I am filing the plan's application on the old Form 5300 (which I am allowed to do pursuant to the IRS for GUST submissions). So I'm stuck with the old rules! But I agree in that I should put down "unit benefit" (Pax, the form asks for me to pick from one of the three I mentioned above or choose "other.").

Thanks again for your very helpful analysis and comments.