Essay about Pensions: Pension and Benefit Obligation

Submitted By keenbeen315
Words: 1510
Pages: 7

Pensions There are many different facets in todays’ accounting world that have to be taken into account. These facets range from bookkeeping, mergers and acquisitions, and taxes to stock and pensions. One concern in today’s world that has everybody worried is the thought of retirement. With inflation and prices rising, planning retirement has become even more imperative despite becoming increasingly difficult. Pensions are one form of retirement planning that is fairly reliable and easy to set up. A pension is a contract for a fixed amount of money to be paid to someone in regular installments usually following retirement. A pension is a built up over many years of service for a company and it is a combination of investments and earnings throughout the years of service. From an accounting point of view, pensions are divided up as accounting for the employer and accounting for the pension fund. There are two types of pension plans. The first is a contributory fund. With this type, the employees have part of the burden as they make payments toward their fund throughout their career. The second type of fund us called a noncontributory fund. With this the employer bears all the costs and pays for the entire fund. Which type of pension fund is used depends on how a company wants to utilize federal income tax benefits. Plans that do offer tax benefits are called qualified pension plans. These plans offer tax deductions from the employer’s contributions and tax free earnings from pension fund assets. There are two sides to pension plans and both will be looked at within this paper. The first type of pension plan is a defined contribution plan. This type of pension focuses on what the employer contributes to a pension based on a formula. This formula is based on factors such as age, length of career, profits, and compensation amount. These plans are normally referred to as 401k plans. The employer turns over the original amounts contributed to a third party. This third party is then responsible for the investment and distribution of pension fund. In this case the employee receives all the benefits or losses from the fund and the employer only contributes yearly the amount decided by a formula. This means that employer must simply make a pension expense entry every year to record the amount that was paid to the pension fund. The pension is recorded as a liability only if the employer has not paid in full the agreed amount and it is recorded as an asset if they make the full payment. Along with the entry the employer must include notes that describe the plan, the determinants of contribution, and the groups covered. The second type of pension plan is a defined benefit plan. This type of plan focuses on the benefits the employee will receive upon retirement. The company must meet the designated benefit commitments upon retirement by determining how much they need to pay in the present to provide enough in the future. This type of plan benefits the employers as its primary purpose is to safeguard and invest assets into the fund in order to pay off the employer’s determined amount to the employee. This means that as long as the plan is alive the employer is responsible for making sure there is enough payment to cover the obligated amount no matter what happens in the trust. This puts employers at risk but also gives them the greatest chance to benefit should too much be allocated to the fund. To make sure that the fund is properly funded companies hire actuaries to ensure that the plans are right for the group of employees being covered. Actuaries compute formulas based on many variables to give estimates on how much the employer needs to place into the fund to meet the obligated amount. There are multiple ways to measure the employer’s obligation to the pension plan. The first type is called vested benefits. These benefits are the benefits that the employee is guaranteed to receive even if they no longer continue…