Quiz 17: Defined Benefit Plan Features

Business

Pension plan Pension plans are part of post retirement benefits paid to the employees. They can be defined contribution plan or defined benefit plan. Under defined contribution plan, employer makes fix percentage of contribution in the plan and similar contribution is made by the employee. Employer's liability is limited to the contribution to be made. Under defined benefit plan, employer contributes to the plan as per the age and service period of the employee. In this case of there is any shortfall for payment to the employee for the services provided the employer will have to make further contribution to the plan. There is no fix contribution as in defined contribution plan. The general theory behind non-discrimination requirement for integrated pension plan is that all employees receive same benefit from pension plan on retirement. The pension plan tries to eliminate the discrimination based on experience, salary amount of employees and each employee is treated equally in the plan.

Private pension plans are designed by employer to provide retirement income to an employee after permanently leaving of the workforce. This retirement plan basically is of two types- 1. Defined Benefit Plan 2. Defined Contribution Plan Distribution of plan benefit is made in two possible methods. They are- 1.  Final pay provision Under this the plan benefit is to be paid to the employee on the basis of their earnings during shorter time period i.e. 5 to 10 years before the retirement age. 2.  Career pay provision Under this method, the plan benefit is paid on the average earning of the employee during its whole participating years in the plan. Final pay provision  serves with both advantages and disadvantages. Advantages  are- 1. It provides more accurate earning during retirement as it is based upon the earning years just prior to retirement. 2. It helps in better objective fulfilment by the employer as compared to the other plan. 3. It is much favourable from employees point of view. Disadvantages  are- 1. It is highly expensive compared to the other plan. 2. In case of non inflationary trend, it is unsuitable to use this method but rather career plan as it would provide result as per economic trends. Thus, final pay provision serves with both advantages and disadvantages as stated above.

Pension plan Pension plans are part of post retirement benefits paid to the employees. They can be defined contribution plan or defined benefit plan. Under defined contribution plan, employer makes fix percentage of contribution in the plan and similar contribution is made by the employee. Employer's liability is limited to the contribution to be made. Under defined benefit plan, employer contributes to the plan as per the age and service period of the employee. In this case of there is any shortfall for payment to the employee for the services provided the employer will have to make further contribution to the plan. There is no fix contribution as in defined contribution plan. The major points to be covered in the report would be the benefit company would obtain from implementing the system. Whether company will be able to provide the increase cost for pension plan and whether all employees would be benefited from the plan. The other point considered would be whether company would receive tax benefit on higher amount contributed towards the plan.

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