Pension Plans

How These Plans Work
  • A pension plan “defines” the benefit an employee will receive at a defined retirement age, typically age 65
  • Participants in pension plans do not have any individual accounts; they also do not have any control over how plan assets are invested
  • Benefit is defined in the plan by a formula that typically takes into consideration an employee’s length of service and average annual pay; for example, a fixed percentage of the average annual pay in the last 3 years prior to retirement, multiplied by the number of years of service
  • A vesting schedule usually will apply such that an employee might only get part or none of his/her defined benefit when he/she leaves the company
  • Distributions are normally made at or after the plan’s defined normal retirement date; most plans allow distributions at an early retirement date with benefits reduced to reflect earlier commencement
  • Distributions will generally be in the form of a guaranteed lifetime annuity, with a percentage of the annuity going to the surviving spouse for married participants
  • All assets of the plan are to be used to pay benefits to participants and their beneficiaries
  • For most pension plans, a certain level of benefits is insured by the Pension Benefit Guaranty Corporation (PBGC), a government agency; employers sponsoring these plans are required to pay annual premiums to secure this protection
Things To Note
  • More and more large corporations are freezing or terminating their pension plans because of legislative restrictions, the vagaries of investment markets and the impact their plans have on the company’s profit and loss statement
  • Pension plans remain attractive for small businesses and professional service firms that have older owners or principals who are close to retirement
  • The employer sponsoring the plan must employ an actuary to determine the annual required employer contributions to the plan to fund benefits
  • An actuary will use acceptable methods, reasonable assumptions about expected mortality, turnover, salary changes, and investment return on plan assets, participant census and actual investment returns to calculate the annual required contributions; assumptions are modified when appropriate
  • Pension plans that cover only the company owners and professional service firms with fewer than 25 employees are not covered by the Pension Benefit Guaranty Corporation (PBGC)
  • Benefits can vary by classes of employees, subject to nondiscrimination testing
What We Can Do
  • Evaluate your objectives and recommend possible plan designs
  • Consult with you on regulatory changes and emerging trends
  • Perform modeling to determine the costs of varying benefit formula
  • Provide actuarial services to determine the annual employer contributions
  • Calculate the annual FAS 87 expense for inclusion in the company’s financials
  • Prepare the annual FAS 87 financial statement disclosure
  • Prepare the annual 5500 return/report required by the IRS with the required actuarial certification (Schedule B), including any necessary interface with the plan’s independent auditors
  • Prepare the annual PBGC premium filing
  • Perform annual coverage and nondiscrimination testing for plans that provide different levels of benefit to classes of employees
  • Calculate the estimated or final benefit for employees retiring or terminating employment
  • Prepare individual benefit statements for covered employees
  • Help with employee communications, including communication materials and employee meetings
  • Prepare plan documents, plan amendments, and required communications to employees
  • Assist in qualifying your plan with the IRS, including preparation of IRS submissions
  • Assist you with any IRS or DOL audit of your plan