ACC327_CH20_Notes

ACC327_CH20_Notes - Chapter 20 Pensions and Other...

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Chapter 20 Pensions and Other Postretirement Benefits 1. To understand fully pension accounting, one should be familiar with the different types of pension plans available. Some of these are A. A pension plan will be either a public plan or a private plan. Public pension plan - is one sponsored by a governmental unit (e.g., the state of Mississippi sponsors a pension for state employees). versus Private pension plan - is one sponsored by a business enterprise (e.g., General Motors). We will concentrate on private pension plans in this course. 1. Private pension plans are governed by federal law as mandated in the Employee Retirement Income Security Act (ERISA). a. ERISA does not set the accounting standards for pensions; it is the statutory law governing the operations of pension funds. B. A pension plan will be either contributory or noncontributory. Contributory pension plan - is a plan whereby both the employer and employees make contributions to the pension fund; contributions do not have to be in equal amounts. versus Noncontributory pension plan - is a plan whereby only the employer contributes to the pension fund. We will concentrate on noncontri- butory plans in this course. C. A pension plan will be either a "defined contribution plan" or a "defined benefit plan." Defined contribution plan - the employer specifies the contributions to the plan, but there is no specification of the amount of benefits to be paid to the retirees. The contributions are usually tied to some base and applied at a specified rate (e.g., 5% of an employee's salary). 1. Accounting for defined contribution plans is quite simple. Pension expense is recorded each period for the amount of the contribution to the fund. The employer has no pension liability
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because the retirees benefits are not defined. versus Defined benefit plan - the amount of the employer's periodic con- tribution to the fund is not specified, but the benefits to be paid to retirees are specifically stated. We will concentrate on defined benefit plans in this course. 1. Contributions are made to the fund by the employer, but the amount of the periodic contributions are not specified so long as they at least meet the minimum requirements set by ERISA. D. A pension plan will be either a "funded" or an "unfunded" plan. Funded pension plan - a plan whereby the employer makes funding contributions to an independent funding agent (e.g., a large bank or insurance company). We will concentrate on funded pension plans in this course. 1. The funding agent is responsible for investing and managing the fund assets. The agent also makes retirement payments to the retirees. versus Unfunded pension plan - a plan whereby the employer retains control of the pension fund. Contributions are still made to the fund except that they are not made to an independent agent. 1. The employer company is responsible for investing and managing
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ACC327_CH20_Notes - Chapter 20 Pensions and Other...

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