The Post Retirement Benefit of Pension Plans
The Post Retirement Benefit of Pension Plans
Marcus Womack
Intermediate Accounting II (ACC 306)
Professor Rick Kwan
September 29, 2010
There are several different types of employment compensation. Salaries and wages that people earn while they are working provide immediate compensation for services provided and are a key factor in managing one’s day to day life. However, there are also various types of compensation that one can earn from employment after they have retired from a company. The purpose of these post-retirement benefits is to ensure livelihood for a person when they are no longer able to work. A pension is one such plan.
A pension is an arrangement—paid in regular installments--to provide people with an income when they are no longer earning a regular income from employment. The goal of pension plans is accomplished by setting aside funds during the years that an employee is working and making those funds along with earnings from investing those funds available when retirement occurs. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or an employer pension and for tax reasons, are usually advantageous to the employer and employee. Favorable tax treatment is an added benefit of pension plans established under specific guidelines. Employers earn special tax deductions while employees are only taxed on the fund contributions after retirement occurs. There are other mutual benefits as well. An employee with a pension plan often feels a sense of retirement security that will cause them to work harder and stay at their job longer. Increased productivity and decreased turnover as a result of sufficient retirement plan offerings enhances a company’s competitive ranking in the labor market.
Pension plans may be classified as either defined benefit or defined contribution plans depending on how the benefits are determined. Defined contribution plans are plans in which the employer agrees to
Marcus Womack
Intermediate Accounting II (ACC 306)
Professor Rick Kwan
September 29, 2010
There are several different types of employment compensation. Salaries and wages that people earn while they are working provide immediate compensation for services provided and are a key factor in managing one’s day to day life. However, there are also various types of compensation that one can earn from employment after they have retired from a company. The purpose of these post-retirement benefits is to ensure livelihood for a person when they are no longer able to work. A pension is one such plan.
A pension is an arrangement—paid in regular installments--to provide people with an income when they are no longer earning a regular income from employment. The goal of pension plans is accomplished by setting aside funds during the years that an employee is working and making those funds along with earnings from investing those funds available when retirement occurs. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or an employer pension and for tax reasons, are usually advantageous to the employer and employee. Favorable tax treatment is an added benefit of pension plans established under specific guidelines. Employers earn special tax deductions while employees are only taxed on the fund contributions after retirement occurs. There are other mutual benefits as well. An employee with a pension plan often feels a sense of retirement security that will cause them to work harder and stay at their job longer. Increased productivity and decreased turnover as a result of sufficient retirement plan offerings enhances a company’s competitive ranking in the labor market.
Pension plans may be classified as either defined benefit or defined contribution plans depending on how the benefits are determined. Defined contribution plans are plans in which the employer agrees to
References: Kilgour, J. G. (2007). The pension plan funding debate and PPA of 2006. Benefits Quarterly, 23(4), p7-20. Lacomba, Juan A.; Lagos, Francisco. (2009) Defined contribution plan vs. defined benefits plan: reforming the legal retirement age. Journal of Economic Policy Reform, Mar2009, 12(1), p1-11 Reilly, David. (2006) Pension reporting sparks debate. Wall Street Journal, 248(3), pC3. Reinstein, A. (2007). New accounting rules for entities offering post-retirement benefits: some implications for bankers. RMA Journal Spiceland, J. D., Sepe, J. F. & Tomassini, L. A. (2007). Intermediate accounting (4th ed.). New York, NY: McGraw-Hill Irwin.