Combination Plan Details

In 2006, the U.S Congress attempted to create an innovative and new retirement plan and came up with the "Eligible Combined Plan," now better known as a combination plan. Since then, the benefit of such a plan is still under review. Some have called it a failure, and some have claimed to have received all benefits from it.

A combination plan is one of many pension plans and one of the ones people choose least often. It is a hybrid program that mixes a defined contribution plan and a defined benefit plan. A defined contribution plan is essentially a traditional retirement plan where employers contribute a part of their paychecks into a tax-deferred fund. The defined benefit plan is a strategy that formulates certain variables like salary and employment time to make smart investments and is usually managed by someone other than the employee.

The combination plan has more aspects of a standard defined contribution plan and a few of a defined benefit plan. This hybrid plan aims to create a pension plan that is as smoothly operating and as beneficial for the employer as possible using the two most commonly requested retirement plans. It gives a variety of options upon retirement specially tailored to the employer's financial situation and preferences. In hybrid plans, the risk of paying higher costs or receiving reduced benefits—as is the case when the investment return is lower than originally expected—is shared between the employer and the employees.

Combination Plan Example

To sign up for a combination plan, you first must qualify for it. Most times, the requirements include being a full-time employee at an organization that offers the plan. Once you decide to purchase a hybrid plan or are given one by your job, you must file two different Form 5300s. This means you ultimately pay two different fees. The Form 5300 costs around $2,700 (March 2021).

Your job will assign you a trustee from the insurance company. This trustee will carry the risk of investments and make the best investment decisions on your contributions. This trustee will receive at least 1% of your pay for each year they are involved in the hybrid plan—but this cannot exceed more than 20 years.

Whatever the trustee does has to be followed up by your employer. If a trustee adds $200 to a 401(k) contribution, then your employer must at least match the contribution with half or more, in this case, $100. Once you retire, you will have access to all contributions. You have to pay the trustee a fee for his service. Depending on the length of the service, the payment will differ.

Combination Plan vs Pension Plan

Pension plans are retirement plans that involve the employee making constant contributions to a particular fund/s. These contributions build up over time and become available for withdrawal at retirement or a certain age. Most times, the funds come with their disadvantages and advantages depending on the retirement plan that the employer chose. A combination plan is a type of pension plan. When you refer to a pension plan, you aren't necessarily giving any specifics to how your plan functions. When you tell people you have a combination plan, you refer to a very specific type of pension plan.