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Unformatted text preview: Chapter 17 - Pensions and Other Postretirement Benefit Plans Pension plans are arrangements designed to provide income to individuals during their retirement years. Funds are set aside during an employees working years so that the accumulated funds plus earnings from investing those funds are available to replace wages at retirement. An individual has a pension fund when she or he periodically invests in stocks, bonds, CDs, or other securities for the purpose of saving for retirement. When an employer establishes a pension plan, the employer provides some or all of the periodic contributions to the retirement fund. The motivation for corporations to establish pension plans comes from several sources. Pension plans provide employees with a degree of retirement security. They may fulfill a moral obligation many employers feel toward employees. Pension plans often enhance productivity, reduce turnover, satisfy union demands, and allow employers to compete in the labor market. A qualified pension plan gains important tax advantages. The employer is permitted an immediate tax deduction for amounts paid into the pension fund. Conversely, the benefits to employees are not taxed until retirement benefits are received. Also, earnings on the funds set aside by the employer accumulate tax-free. For a pension plan to be qualified for special tax treatment, these general requirements must be met: 1. It must cover at least 70% of employees. 2. It cannot discriminate in favor of highly compensated employees. 3. It must be funded in advance of retirement through contributions to an irrevocable trust fund. 4. Benefits must vest after a specified period of service, commonly five years. 5. It complies with specific restrictions on the timing and amount of contributions and benefits. This is a noncontributory plan because the corporation makes all contributions. When employees make contributions to the plan in addition to employer contributions, its called a contributory plan. This is a defined contribution plan because it promises fixed annual contributions to a pension fund, without further commitment regarding benefit amounts at retirement. The vested benefit obligation is the pension benefit obligation that is not contingent upon an employee's continuing service. The accumulated benefit obligation is the discounted present value of retirement benefits calculated by applying the pension formula with no attempt to forecast what salaries will be when the formula actually is applied. The projected benefit obligation is the present value of those benefits when the actuary includes projected salaries in the pension formula. The projected benefit obligation can change due to periodic service cost, accrued interest, revised estimates, plan amendments, and the payment of benefits....
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- Spring '12