Chapter 17 - Pensions and other postretirement benefits. Employee compensation comes in many forms. Salaries and wages, of course, provide direct and current payment for services provided. However, it’s commonplace for compensation also to include benefits payable after retirement. We discuss pension benefits and other postretirement benefits in this chapter. | Pensions and Other Postretirement Benefits 17 Chapter 17: Pensions and Other Postretirement Benefits Nature of Pension Plans Sponsor I agree to make payments into a fund for future retirement benefits for employee services. Participant I am the employee for whom the pension plan provides benefits. 3 The basic nature of a pension plan is that the company and or the employee make contributions to a fund manager. The manager invests the funds and makes payments to retired employees. The amount of the contributions to the fund manager is often determined by an actuary. Nature of Pension Plans For a pension plan to qualify for special tax treatment it must meet the following requirements: Cover at least 70% of employees. Cannot discriminate in favor of highly compensated employees. Must be funded in advance of retirement through a trust. Benefits must vest after a specified period of service. Complies with timing and amount of contributions. 3 Here are the five conditions that must be met for a pension plan to receive special tax treatment. As an overview, special tax treatment is afforded those plans that are nondiscriminatory as to employees, and that are funded prior to retirement with a trustee. Nature of Pension Plans The right to receive earned pension benefits vest (vested benefits) when it is no longer contingent on continued employment. 7 The fourth condition from the previous slide deals with the vesting issue. An amount that is vested is payable to the employee at retirement and is not contingent upon continued employment. Learning Objectives Explain the fundamental differences between a defined contribution pension plan and a defined benefit pension plan. LO1 Our first learning objective in Chapter 17 is to explain the fundamental differences between a defined contribution pension plan and a defined benefit pension plan. Contributions are established by formula or contract. Employer deposits an agreed-upon amount into an employee-directed investment fund. . | Pensions and Other Postretirement Benefits 17 Chapter 17: Pensions and Other Postretirement Benefits Nature of Pension Plans Sponsor I agree to make payments into a fund for future retirement benefits for employee services. Participant I am the employee for whom the pension plan provides benefits. 3 The basic nature of a pension plan is that the company and or the employee make contributions to a fund manager. The manager invests the funds and makes payments to retired employees. The amount of the contributions to the fund manager is often determined by an actuary. Nature of Pension Plans For a pension plan to qualify for special tax treatment it must meet the following requirements: Cover at least 70% of employees. Cannot discriminate in favor of highly compensated employees. Must be funded in advance of retirement through a trust. Benefits must vest after a specified period of service. Complies with timing and amount of contributions. 3 Here are the five conditions that must be met
