IFA Chapter 20- Accounting for Pensions and Postretirement benefits

A. Nature of Pension Plans
A Pension plan is an arrangement whereby an employer provides benefits (payments) to retired employees for the services they performed in their working years. Pension accounting may be divided and separately treated as accounting for the employer and accounting for the pension fund. The company or employer is the organization sponsoring the pension plan. The fund or plan is the entity that receives the contributions from the employer, administers the pension assets, and makes the benefit payment to the retired employees (pension recipients).

A Pension plan is funded when the employer makes payment to a funding agency. The agency accumulates the assets of the pension fund and makes payment to the recipient as the benefits come due.
Some pension plans are contributory, in which the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits.
Other plans are non-contributory, in which the employer bears the entire cost.
Plans that offer tax benefits are often called qualified pension plans. They permit deductibility of the employer’s contribution to the pension fund and tax-free status of earnings from pension fund assets.
The pension fund should be a separate legal and accounting entity.
This chapter explains the pension accounting and reporting problems of the employer as the sponsor of the plan.

The two most common types of pension plans are: * Defined contribution plans * Defined benefit plans

Defined Contribution Plan
… The employer agrees to contribute to a pension trust a certain sum each period, based on a formula. The plan defines only the employer’s contribution.
A company usually turns over to an independent third-party trustee the amounts originally contributed. The trustee (acting