contractual arrangement in which the employer provides benefits to employees upon retirement. Many plans include disability and death benefits. A pension plan involves recognizing the employer's cost and the funding of pension benefits. Pension expense is tax-deductible to the employer. The employee is taxed when the pension annuity is received from employer contributions or originally not-taxed employee contributions. The two most common types of plans are defined contribution pension plan and defined benefit pension plan. Pension plan provisions vary from company to company. For example, the pension plan may be contributory or noncontributory, meaning the employee may or may not also make payments to the pension plan.
provides replacement for salary when a person is no longer working. In the case of a defined benefit pension plan, the employer or union contributes to the plan, which pays a predetermined benefit for the rest of the employee's life based on length of service and salary. Payments may be made either directly or through an annuity. Pension payments are taxable income to recipients in the year received. The employer or union has fiduciary responsibility to invest the pension funds in stocks, bonds, real estate, and other assets; earn a satisfactory rate of return; and make payments to retired workers. Pension funds holding trillions of dollars are one of the largest investment forces in the stock, bond, and real estate markets. If the employer defaults, pension plan payments are usually guaranteed by the Pension Benefit Guaranty Corporation (PBGC).
In the case of a defined contribution pension plan, such as a 401(k) or 403(b) plan, employees choose whether or not to contribute to the plan offered by the employer, who may or may not match employee contributions. Pension benefits are determined by the amount of assets built up by the employee during his or her years of contributions. Self-employed individuals can also set up pension plans such as keogh plans. An Individual Retirement Account (IRA) is a form of pension plan.
retirement program to provide employees (and often, spouses) with a monthly income payment for the rest of their lives. To qualify, an employee must have met minimum age and service requirements. Benefit formulas can be either the defined contribution pension plan (money purchase plan) or the defined benefit plan. The Employee Retirement Income Security Act of 1974 (ERISA) requires a pension plan to provide an income for the rest of a retired employee's life, and at least 50% of that amount to the surviving spouse of a retired employee for the rest of her life, unless the spouse waives this right in writing. Death and disability benefits are also provided by most pension plans. The tax reform act of 1986 has changed the vesting requirements. Funds for these plans can be generated under numerous pension plan funding instruments.
