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New Combination Plan

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The Pension Protection Act of 2006 establishes a new kind of hybrid pension plan for employers with 500 or fewer employees.

The new “DB(k) plan” combines a traditional defined benefit pension plan with a 401(k) savings plan. The DB(k) plan provides a low employer-paid guaranteed lifetime monthly retirement benefit that can be supplemented by voluntary tax deferred contributions by employees. The minimum pension benefit, payable to employees who work 3 or more years for the employer, is equal to the lesser of 1 percent of average pay during the last five years of work multiplied by the number of years of service with the employer, or 20 percent of the average pay in the employee’s consecutive highest 5 years of earnings.

The 401(k) component of the plan requires the employer to match at least 50% of an employee’s contributions up to 4% of the employee’s salary. The DB(k) became legal on Jaunary 1, 2010.

Previously, employee contributions to traditional pension plans were not tax deferred. For that reason, few pension plans required or permitted employee contributions. Instead, many employers supplemented their pension plans with separate 401(k) plans which permit employees to defer taxes on their contributions.

Read Section 903 of The Pension Protection Act of 2006 Public Law 109-280.

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