D105 - Unit 7
Commonly, in a defined benefit plan, who makes the contributions to the plan?
An employer Under a defined benefit plan, only the employer is responsible for the payment of the contributions to the plan.
A company includes a pension plan as part of its overall compensation package. Employees may voluntarily make payments to increase benefits, and they assume part of the cost of the benefits. Which type of plan is described in this scenario?
Contributory plan The employee can contribute funds to a contributory plan.
A company provides a pension plan to eligible new hires. Pension payments are typically based on the employee's years of service and the compensation level as the employee approaches retirement. It is the responsibility of the employer to pay any shortfall in the accumulated assets held by the trust. Which type of plan is described in the scenario?
Defined benefit plan A defined benefit plan shifts the responsibility of a shortfall to the employer.
Which plan outlines the payments that employees will receive when they retire?
Defined benefit plan A defined benefit plan specifies the paymenst employees will receive at retirement
Which type of plan is a 401(k)?
Defined contribution A 401(k) states the defined contribution an employer will make to the account on behalf of the employee.
A company has a pension plan where the employer agrees to fund a fixed amount to a pension trust each pay period. The payment is based on a formula that considers the employees' age, length of service, salaries, and employer's profits. What is the name for this type of pension plan?
Defined contribution In this type of plan, several factors determine how much the employer contributes to the employees' pension plan.
Which plan involves an employer adding a certain sum to a pension trust each period, based on a formula?
Defined contribution plan For a defined contribution plan, the employer agrees to contribute.
Which type of U.S. pension plan has grown in the number of active participants over the past 40 years?
Defined contribution plans Defined contribution plans have become much more popular with employers than defined benefit plans due to lower employer costs.
Which factor is a function of the defined benefit plan funding model for each employee's benefit?
Employee's compensation level Employee benefits are a function of an employee's compensation level for a defined benefit plan.
In substance, who do the trust assets and liabilities belong to under a defined benefit plan?
Employer The assets and liabilities belong to the employer.
Which category is considered in a defined contribution plan?
Employer payments Employer payments are defined in a defined contribution plan.
What is the purpose of a pension plan?
For an employer to provide benefits to retired employees Under a defined contribution plan, the employee gets the benefit of gain (or the risk of loss) from the assets contributed to the pension plan.
Which factor is considered when calculating an employee's pension payment in a defined benefit plan?
Length of service In a defined benefit plan, employees receive benefits based on length of service and salary.
In a defined benefit plan, what is meant by the process of funding?
Making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims A pension plan is funded when the employer makes contribution payments to a funding agency.
A company includes a pension plan as part of its overall compensation package. The employer bears the entire cost of the plan. Which type of plan is described in this scenario?
Noncontributory plan The cost of a noncontributory plan is borne by the employer.
Fluffle Company bears the entire cost of its employee pension. Which type of plan does Fluffle have?
Noncontributory plan Under a noncontributory plan, the employer bears the entire cost of the pension plan.
Which calculation is used to measure the funding needed for projected benefit obligations of a defined benefit plan?
Present value Cash flows will not be paid until a future date, so the present value is used to determine present funding.
Which type of pension plan allows employees to deduct contributions from their personal taxable income?
Qualified Qualified pension plans allow employees to deduct contributions from their personal taxable income.
A company provides employees with a noncontributory defined benefit plan as part of the overall compensation package. Which characteristic is associated with this type of plan?
The company is at risk for payments falling short of the future benefits. An employer is not at risk for a short fall in defined contribution plans but is at risk for defined benefit plans falling short of projections.
Fundamentals of pension plan accounting
The company or employer is the organization sponsoring the pension plan. It incurs the cost and makes contributions to the pension fund. The fund or plan is the entity that receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients (retired employees). The fund should be a separate legal and accounting entity; it maintains a set of books and prepares financial statements. The two most common types of pension arrangements are defined contribution plan and defined benefit plan.
Who benefits from the gain (or risks the loss) from the assets contributed to a defined contribution plan?
The employee Under a defined contribution plan, the employee gets the benefit of gain (or the risk of loss) from the assets contributed to the pension plan.
Defined contribution plans
The employer agrees to contribute to a pension trust a certain sum each period based on a formula. This formula may consider such factors as age, length of employee service, employer's profits, and compensation level. Only the employer's contribution is defined; no promise is made regarding the ultimate benefits paid out to the employees. A defined contribution plan is a contributory plan. Under a contributory plan, the employee bears part of the cost of the plan. However, under a non-contributory plan, the employer bears the entire cost of the pension plan.
How is a noncontributory pension plan funded?
The employer makes payments to the funding agency. In a noncontributory pension plan, the employer makes contributions to the funding agency
Which statement accurately describes an employer's accounting when making a required contribution to a defined contribution pension plan?
The employer pays an amount each year to the plan based on a formula calculated by the plan. The employer makes a defined contribution based on the plan's future payout.
Which amount does a defined contribution plan specify?
The required payment amount by the employer A defined contribution plan only defines the employers payment.
Defined benefit plans
These plans define the benefits that the employee will receive at the time of retirement. The formula typically provides for the benefits to be a function of the employee's years of service and the compensation level when he or she nears retirement.
What is the purpose of a formula in a defined benefit plan?
To define the benefits that the employee will receive at the time of retirement Because a defined benefit plan specifies benefits in terms of uncertain future variables, a company must use a formula to define the value of future benefits to the employee and establish an appropriate funding pattern to ensure the availability of funds at retirement in order to provide the benefits promised.
What is the purpose of the formula used in a defined contribution plan?
To require an employer to contribute a certain sum each period based on the formula In a defined contribution plan, the employer agrees to contribute to a pension trust a certain sum each period, based on a formula.
How do companies generally design pension plans?
With qualified plans Generally, companies design their pension plan as a qualified plan to take advantage of tax benefits of the plan. The employer is permitted to deduct the cost of their contributions to the pension plan.
