Retirement Pension Plans
| Author | Jeffrey Wilson |
| Pages | 1269-1272 |
Page 1269
A pension plan is an organized investment program designed to provide income during older age or retirement years. Pension plans may be individually arranged or come through an employer. Because most qualified programs and plans offer a form of social insurance, the federal government treats them favorably, with deferred taxation and portability benefits.
Tax Treatment: Pension fund contributions from both individuals and contributing employers are tax deductible. Fund earnings on the invested contributions are tax deductible. Benefits are not taxed until they are actually paid out—during retirement years when retirees would presumably be in a lower tax bracket. It is this treatment that provides the incentive for most persons to invest in pension plans rather than savings accounts or other investments, which are taxed when the interest is earned or the investment growth is "realized."
Portabililty: Formal pension plan administrators may invest pension funds in various portfolio schemes and may move funds around to maximize investment return. Likewise, individuals may "roll-over" funds from one account to another, without invoking a tax penalty (in most cases) and without losing the funds' distinction as constituting part of a "pension plan."
A pension plan is a contract between employer and employee. However, an employer can modify or alter the plan unilaterally in most cases. In the United States, most employer-provided pension plans are "defined benefit plans"; the other major type is referred to as a "defined contribution plan."
DEFINED BENEFIT PLANS: Under such plans, employees receive benefits based on a formula, usually years of service and percent of salary. This arrangement promises the employee a benefit in the form of a specific dollar amount per payment period dur-
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ing retirement. For example, the plan might specify that a worker will receive an annual pension equal to 1.5 percent of his or her average salary over the most recent five years, times the years of service. Upon retirement, the employer or plan administrator pays that specific amount.
DEFINED CONTRIBUTION PLANS: Under these plans, employers pay a specific amount or percentage into a pension fund annually. The funds are allocated to individual employee accounts. Retiring employees receive benefits according to how much money they have in their fund upon retirement. This may be taken as a lump sum or used to purchase an annuity that will pay monthly benefits for a set number of years. The amount of annuity benefit and the years payable depends on how much was in the fund at retirement.
EMPLOYEE STOCK OPTION PLANS (ESOPs): ESOPs are considered defined contribution plans. In such plans, employees either earn (as an employee benefit) or purchase company stock. At least 51 percent of the assets of an ESOP must be invested in the company. (Conversely, regular defined benefit or defined contribution pension programs may not invest more than ten percent of funds into company stock, excepting some 401(k) plans.)...
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