ILRHR4631 Week 8 Lecture - Managing Compensation Spring...

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Managing Compensation Spring 2009 ILRHR 4631 Week 8 Lecture Charles G. Tharp
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Retirement and Savings Plan Payments Defined benefit plans Defined contribution plans The Employee Retirement Income Security Act (E.R.I.S.A.)
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How Much Retirement Income to Provide? What level of retirement income should be set as a target? Should social security benefits be factored in when considering level of retirement income? Should other post-retirement income sources be integrated with pension? How large a role should seniority play in determining pension level? What can a company afford?
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Employee Retirement Income Security Act (E.R.I.S.A.) (1 of 2) What is the purpose of ERISA?
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Employee Retirement Income Security Act (E.R.I.S.A.) (1 of 2) Eligibility: Employees at least 21 years old and completed one year of service Vesting: Cliff vs. graded Year of service: 12 months of employment with employer in which employee works 1,000 hours Fiduciary responsibilities: “Prudent- person” rule
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Employee Retirement Income Security Act (E.R.I.S.A.) (2 of 2) Funding requirements: Specified in act Plan documentation: Summary plan description distributed to all participants Reporting: Annual Report Form 5500 filed with IRS Pension Benefit Guaranty Corporation (PBGC): Insures payment of certain pension plan benefits
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Characteristics of Qualified Plans To qualify under ERISA, a pension plan must: Be in writing and be communicated to employees Be established for the exclusive benefit of employees or their beneficiaries Satisfy certain rules concerning eligibility, vesting, and funding Not discriminate in favor of officers, share- holders, or highly compensated employees.
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Qualified Plans (continued) Tax Benefits: Employer receives an immediate tax deduction for contributions The earnings accumulate tax deferred until withdrawn The employee pays taxes on the funds only when the benefits are received Types: Defined Benefits Plans and Defined Contribution Plans
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Defined Benefit Plans Employer agrees to provide a specific level of retirement pension, expressed as either a: fixed dollar, or percentage-of-earnings amount that may vary (increase) with years of seniority in the company. Employer finances this obligation by: following an actuarially determined benefits formula making current payments that will yield the future pension benefit for a retiring employee.
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Defined Contribution Plans Require specific contributions by employer.
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