What is the Defined Benefit Plan?
The Defined Benefit Pension Plan offers each participant benefits based on a predetermined (defined) formula. This formula takes into consideration years of credited service and final average monthly compensation (an average of the salary for the five highest consecutive salary years in a career) at the normal retirement date (age 65). Individual accounts are not maintained (although this was the case under the old Defined Contribution Plan). Benefits paid to each person as a retirement benefit are based on the formula. Therefore, the funds in a defined benefit pension fund are all working together in a pool. The Defined Benefit Plan is based on the promise to pay and absorbs the risk for investment performance whether it’s good or bad (the plan actuary monitors all factors to ensure that the plan is able to pay as promised). Any investment earnings help support the plan in paying benefits and improving benefits for plan participants.
What benefits can be expected from the Defined Benefit Pension Plan?
The primary purpose of the pension plan is to provide retirement income needs. However, other situations require additional income as well. The plan also provides benefits to participants and/or their beneficiaries in the event of disability or death .
How is the Defined Benefit Plan funded?
Each participating church or organization contributes 10.5% of the annual compensation of each participating employee to the fund. Please see the Pastors Compensation Calculator for more details on how “compensation” is defined for pension purposes.
The minimum annual contribution that must be made to the plan on behalf of any employee is $500. (This rule applies to employees whose total annual compensation is under $4,762, as 10.5% of their compensation would be under $500 per year.) Please note that there is also a special contribution rate for church plants (only so long as they are classified as a church plant by the conference – once the congregation becomes a fellowship, regular pension plan contributions apply). Church plants pay at a rate of $500 per year for as long as they are classified a church plant. Although actual compensation figures for low-income pastors and pastors of church plants should be reported, the Human Resources office will make an adjustment to the pension contribution report to bring the annual contribution up to $500 ($125 per quarter).
The church or other employer pays into the plan on behalf of the employee – neither the employer nor the employee are allowed to make additional payments into the plan over and above the set contribution amount. Those who wish to invest funds in some additional way are encouraged to seek out a personal investment opportunity such as an IRA or 403(b) account. (For information about such investment vehicles, contact Human Resources, the Free Methodist Foundation or a personal financial advisor.)
Who is eligible for the Defined Benefit Plan and when may they enroll?
How can participants project what they will receive from the Defined Benefit Plan?
Participants receive an annual statement that shows their accrued benefit to date and also projected benefits at ages 60, 62 and 65. Using the participant’s current level of compensation, the calculation applies current plan formulas to past service and projected future service until retirement age. As changes are made to the plan formula, the accrued retirement benefit listed on the statement will reflect the changes.
What are credited service years?
“Credited Service Years” is defined as the total of the years since January 1, 1981, during which contributions were made to the Defined Benefit Plan on the participant’s behalf.
What are years of vesting service?
If an employee terminates employment with the church for reasons other than retirement, disability or death, that person’s retirement benefit will be determined by their “years of vesting service.” It is important to note that if an employee reaches the age of 65, dies or becomes disabled while still employed but before they are fully vested, as defined below, they will automatically become fully vested.
A “year of vesting service” refers to a complete 12-month period, beginning with the employee’s date of employment, during which employment is continuous. A “vested benefit” is that portion of an accrued benefit to which a participant has a non-forfeitable right. A participant must have five complete years of vesting service in order to be eligible to receive any retirement benefit from the plan. At the completion of the five years, they would then receive 50% of their benefit upon retirement. As each year after five years is completed, the participant will receive 10% more of their benefit upon retirement, until they reach 10 years of service, at which time they will be considered fully vested and will receive 100% of their benefit upon retirement.
Vesting for the Defined Benefit Plan is based on the following schedule:
Years of Credited Service – Vested Percent of Accrued Benefit
Less than 5 years of vested service – 0%
5, but less than 6 years of vesting service – 50%
6, but less than 7 years of vesting service – 60%
7, but less than 8 years of vesting service – 70%
8, but less than 9 years of vesting service – 80%
9, but less than 10 years of vesting service – 90%
10 or more complete years of vesting service – 100%
If a participant terminates employment and is rehired within five years, their prior vesting and credited service years will be reinstated. If a person is not rehired within five years and has a vested benefit, they may request to cash out their benefit, providing the actuarial lump sum balance is less than $5,000. (Please call the Human Resources office to find out the actuarial lump sum balance.) The employee must have been terminated from employment for a minimum of five years before any amounts can be paid out.
If a participant is rehired after five years and a previous benefit was established (they have a vested benefit from their previous service), the employee will begin to accrue a new benefit. The previous benefit will remain and will be considered a separate benefit.
What if a participant terminates employment?
When a participant terminates employment, the conference must fill out a “Notice of Change of Status” form and send it to the Human Resources office. It is important to list the termination date on section three of the form. Also, list the employee’s personal address on the “church address” line in section four so that they can be contacted regarding their pension benefits.
How early can a participant retire?
The normal retirement date is the first day of the month coinciding with or following the participant’s 65th birthday. When a participant who is still serving reaches their normal retirement date, the accrued benefit becomes 100 percent vested, regardless of their years of service. Early retirement may be taken as early as the age of 60 if the participant is credited with at least 10 years of vesting service. Defined Benefit participants may elect to receive an early retirement benefit, which will be equal to the accrued benefit reduced by a factor of 1/180 for each month that the benefit begins prior to the normal retirement date (age 65). A participant may choose to defer the start of their retirement benefit past age 65.
Is it wise to take an early retirement benefit?
Individuals must answer this question based on their specific income needs. In trying to compare taking the early retirement benefit to taking the larger benefit at a later date, one should compare the amount of the higher benefit at a later retirement date to how long it would take to recover the amount that would be received during the early retirement years. For example, a retiree at 62 drawing $790 per month would receive $28,440 in the three years between ages 62 and 65. At age 65, the retiree could draw $988 per month, which would be $198 more per month than at age 62. In this illustration it would take the retiree 12 years (in this case, to age 77) to make up the $28,440 in the additional money that would be received by waiting to draw the benefit at age 65.
Understand that all situations may not be the same as this example. Each situation must be considered on a case-by-case basis, taking into account factors such as health, life expectancy, financial situation, etc.
What if a participant retires after age 65?
If a Defined Benefit participant works beyond age 65, their pension payment can (but does not have to) be deferred until they actually retire, in which case the participant will continue to receive credited years of service past the age of 65. If the still-working participant elects to begin receiving benefits at the age of 65, the benefit will be calculated in the same manner as a normal retirement benefit. If the participant elects to defer their benefit past the age of 65, they will be given the greater of either the normal payment or the amount arrived at by increasing the benefit at age 65 by three quarters of 1 percent for each month benefit payments have been postponed after age 65.
What if a participant retires, but later becomes re-employed by the church?
If a Defined Benefit participant aged 65 or older is rehired, they may have an additional benefit added to their first retirement benefit. If this becomes the case, the second benefit will be based on the additional years served after their initial benefit payments began. The additional benefit will be calculated using the total years of service and the final average monthly compensation received throughout the participant’s career. The participant must elect the same payment option for the second benefit as they elected for their first benefit. A participant who is drawing retirement benefits and has returned to work after the age of 65 is entitled to only one benefit recalculation, so is advised to carefully consider when they wish to request the recalculation.
How does a participant apply for retirement benefits?
To apply for retirement, the participant should contact the Human Resources office at the Free Methodist World Ministries Center at least 60 days ahead of the actual retirement date. This can be done by telephone or mail. When calling for an estimate of their retirement benefit, they should be as specific as possible as to the planned retirement date and when payment of benefits is to begin. Participants should be aware that the Human Resources office can only provide a benefit estimate at the point of application for retirement.
When participants are ready to draw their retirement benefit, they should notify the Human Resources office. A retirement application along with a letter explaining the retirement process will be sent to them. In order to begin the processing for benefits, the completed application, along with a copy of a driver’s license or birth certificate for both the participant and the beneficiary, must be received by the Human Resources office.
After the completed retirement application is received by Human Resources, a final benefit calculation will be mailed to the participant. The participant should then select the benefit option desired and note when the benefit should begin. Included with the final calculation will be a W-4P federal income tax withholding form, a pastor’s housing allowance form, and a direct deposit form. All of these forms must be completed and returned to the Human Resources office by the 20th of the month prior to the month the benefit is to begin. The participant will then receive a benefit certificate confirming the option chosen.
How are monthly benefits paid out?
Monthly benefit payments for the coming month are issued by direct deposit on the last business day of each month. The payment goes directly into the retiree’s bank account on the pay date.
Are retired pastors still able to declare a housing allowance?
Participants who are ministers may declare their retirement benefits as a housing allowance based on Internal Revenue Service regulations. By action of the Benefits Committee, all eligible ministers drawing a pension benefit may designate up to 100% of their benefit amount as a housing allowance (this is done using an official form, which must be submitted to the Human Resources office). A declaration form will be sent with the participant’s retirement information packet. It is the minister’s responsibility to determine the appropriate amount of their housing allowance.