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Definition: Flat Benefit Formula
It is a formula for calculating the contribution by the employer into the defined benefit plan- which would be explained later- of an employee working in that organisation. This formula uses the number of months the employee provided his/her services and this is multiplied by a monthly rate which has already been determined.
Let us now talk about Defined Benefit Plans. In a defined benefit plan, future benefits of each employee is calculated by using a customized formula, and a small amount of benefit is provided on retirement. Normally, the promised benefit is directly proportional to the employee’s income, time-period of service, or both of them.
For example, an employer may make a provision to give each employee a fund which is calculated as a fraction of the employee’s last five years’ mean wage multiplied by the total number of years of service at the point of retirement, or the other case may be that the employer decides to pay a flat rupee amount as per the years of service. A defined benefit plan is mostly non-contributory— that is, employee contributions are usually not present. Moreover no personal and individual bank accounts are maintained usually for each of the employees. Regular contributions to the plan are usually made by the employer in order to fund the employees’ benefits for the future. The employer takes the full the risk of giving the predetermined level of retirement benefits. Talking about some facts, according to U.S. Department of Labour, in 1993, around 56 percent of full-time employees of private companies which were either medium or large had been covered by these defined benefit plans.
The sponsors of defined benefit plans are free to choose from various formulas available to determine the retirement benefits. These include:
- Final Pay Formulas
- Career Average Formulas
- Flat Benefit Formulas, which has been just explained.