Qualified Pension Plans vs Non-Qualified Pension Plans Term Paper
- Length: 8 pages
- Subject: Economics
- Type: Term Paper
- Paper: #50016273
Excerpt from Term Paper :
Pension Plan Being Qualified
What are the permitted pension benefit plans?
What is the problem?
What is the solution?
The end result
The paper shall first inform that when any individual chooses a pension plan he should try to choose a plan that is qualified as the growth in value of the investments inside the plan are not taxable till the amounts are distributed to the investor, the contributions made by an employer to the plan are also deducted from tax within limits, and the permitted contributions by the employees are also not taxable till they have been given to the employee. We shall next look at the two main types of plans are called cash balance plans and 401(k) plans. Among the two, cash balance plans are supposed to have definite benefits at the end of a certain number of years, and 401(k) plans require the contributor to make definite contributions. Apart from this the paper notes that there are differences that should be noted. We shall next analyze the problems which arise. The problem is coming up due to the availability of low funds in the pension funds in the country. The problem of pension funds is with every American who is at a level of not having a lot of surplus money. The pension payments that he gets are expected to help him when his income goes down as there is no income then. The problem now is that even recognized pension funds are not likely to pay the amounts that were expected, and these funds were supposed to be the ones with government support. It is now a difficult decision for the workers to decide what they will do in future. The paper in the next section shall deal with the various solutions offered. There may be various approaches to the problem, and the present government has concentrated on single payer plans and has recommended that the premium paid by the employers for guaranteeing the benefit to the employees be increased from the present $19 a year to $30 a year. Congress must take the steps carefully so that the financial situation of PBGC is improved. The paper concludes with the understanding that the question is one of an attitude of the government, and it can choose to support the employees or the employers.
Qualified pension plans v Non-Qualified pension plans
One of the most important decisions that an American takes in his life is regarding the retirement plan. The reason is that he or she expects to live on the proceeds of this plan for 18 years after retirement. Thus every individual has to understand the rights and responsibilities under the plan. All members who are covered by a retirement have certain rights according to the federal government. They also have responsibilities. There are also rights and responsibilities for the persons who sponsor a retirement plan. All the concerned laws are laid out in a law called the Employee Retirement Income Security Act of 1974, or ERISA. There are different responsibilities of Federal agencies regarding the implementation of this plan. The concerned employer or anybody else has to provide the information about the plan one has participated in, as also the right to get other information from them, time to time, at no additional cost. It is also important for the concerned investor to keep abreast of the changes in the plan. (What You Should Know About Your Retirement Plan)
The importance of the pension plan being qualified
When any individual chooses a pension plan he should try to choose a plan that is qualified as the growth in value of the investments inside the plan are not taxable till the amounts are distributed to the investor, the contributions made by an employer to the plan are also deducted from tax within limits, and the permitted contributions by the employees are also not taxable till they have been given to the employee. The types of plans under this are many and some are the old types of defined benefit pension plans, the popular plan of 401(k) which has a defined contribution and other plans. At the same time, it should be noted that all such plans have to be sponsored by the employer. It should be an important matter in seeking employment that one has access to a qualified plan. This is very important for the employee to continue living after retirement. At the same time, even in a qualified plan, the design is important, and the most important is the benefit that has to be paid in a defined benefit pension. Another question is the money that is paid out then what are the eligibilities for getting the payment? If the pension is of the type called 401(k) then is the employer making an equal contribution to the fund for the employee? Finally, what is the total fund that is available? (Qualified Pension Plan)
Thus it is clear that on the normal course, all employees would like to be part of a qualified plan as the plan itself gets benefits from the government in terms of no tax having to be paid by the employees on the money that is contributed or saved in the account. At the same time, the whole issue of the pension regulations has come under scrutiny as there has been a serious mishap regarding pension funds at United Airlines. This has led Mr. Boehner, the Education and WorkForce Committee chairman to say that the laws presently governing pension funds are out of date and is now causing the workers at the peril of losing benefits and then the entire government system has to provide funds so that the pension system can work out. The entire system is only 30 years old. United Airlines is bankrupt and the four employee pension plans that it had are now being taken over by the guarantor from the federal government. (2 Republicans to Propose Fix for Private Pension Woes)
What are the permitted pension benefit plans?
The two main types of plans are called cash balance plans and 401(k) plans. Among the two, cash balance plans are supposed to have definite benefits at the end of a certain number of years, and 401(k) plans require the contributor to make definite contributions. Apart from this there are four differences that should be noted. The first of these is that in a cash balance plan, there has to be no definite contribution by the workers to the pension plan, whereas in the case of a 401(k) type of a plan, the worker has to definitely choose to make a contribution to the plan. This may be the full contribution or part thereof. The second difference is in the area of investment risks and in the case of cash balance plans, the employer manages the funds generated and gains from the benefits or shortfalls in the cash balance. He may also have an investment manager for the purpose. The benefits that are promised to the employees are not affected by the growth or decline of the funds themselves. (Frequently Asked Questions about Cash Balance Pension Plans)
In contrast, 401(k) plans often allow the members of the fund to let the funds flow to certain permitted categories. In this case, the risks are borne by the participants due to any extra growth or shortcoming in the fund. The third difference is that cash balance funds have to provide the benefits to the members in the form of annual annuities which is not permitted in the 401(k) plans, in general. Finally there is an organization called the Pension Benefit Guaranty Corporation which has to guarantee all cash benefits to the cash balance plans as it insures all cash balance funds. Defined contribution plans including 401(k) plans are not insured by the corporation and it has no responsibility to pay pension benefits to their members, which it has to pay to the members of a cash balance fund after assuming the trusteeship of the fund from the previous trustees which have insufficient funds on hand at a time. (Frequently Asked Questions about Cash Balance Pension Plans)
While both the defined benefit plans and cash balance plans generally offer the pension benefit as a series of benefits extending throughout the life of the employee, in general the benefit plans define the benefit as one which has to start from the date of retirement of the employee. On the other hand cash benefit plans define the benefit as a 'cash balance' stated for the employee. These accounts are not like other accounts s they do not reflect deposits or withdrawals, or even increases due to interest or decreases due to losses. In a typical cash balance plan, the account is credited every year due to a pay credit, and this may be 5% of the annual salary of the employee in general. Another credit is due to the interest on the balance and this is at a variable…