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In: Accounting

Pensions If you were a business owner, what type of plan would you offer your workers?...

Pensions

If you were a business owner, what type of plan would you offer your workers? Why this type?

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Expert Solution

Pension Plan : A pension fund provides a fixed, preset benefit for employees upon retirement, helping workers plan their future spending. With a defined-benefit plan, you usually have two choices when it comes to distribution: periodic (usually monthly) payments for the rest of your life or a lump sum distribution.A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit.

I would like to consider for Cash Balance Plans. these plans are referred to as hybrid plans.A cash balance plan is a type of defined benefit plan that resembles a defined contribution plan. A traditional defined benefit plan promises a fixed monthly benefit at retirement that is usually based upon a formula that takes into account the employee's compensation and years of service.A cash balance plan looks like a defined contribution plan because the employee's benefit is expressed as a hypothetical account balance instead of a monthly benefit.Each employee's "account" receives an annual contribution credit, which is usually a percentage of compensation, and an interest credit based on a guaranteed fixed rate or some recognized index like the 30 year U.S. Treasury bond rate which could vary.

As in a traditional defined benefit plan, the employer bears the investment risks and rewards in a cash balance plan. An actuary determines the contribution to be made to the plan, which is the sum of the contribution credits for all employees plus the amortization of the difference between the guaranteed interest credits and the actual investment earnings (or losses).

Although the plan is required to offer the employee the option of using the account balance to purchase an annuity benefit, most employees will take the cash balance and roll it over into an individual retirement account (unlike in many traditional defined benefit plans which do not offer lump sum payments at retirement).

Employees appreciate this design because they can see their "accounts" grow, but they are still protected against fluctuations in the market. In addition, a cash balance plan is more portable than a traditional defined benefit plan since most plans permit employees to take their cash balance and roll it into an individual retirement account when they terminate employment or retire.

The cash balance plan acts similar to a defined-contribution plan also because changes in the value of the participant's portfolio does not affect the yearly contribution.


Benefits :

1.Cash balance pensions are one of the fastest growing segments of small business retirement plans. They offer the opportunity for business owners to ramp up their retirement contributions and to receive a sizable tax deduction.

2.Each participant has their own account, much like in a 401(k) plan. At retirement, participants can take their payments as an annuity or, in some plans, there is an option to take a lump-sum distribution that can be rolled over to an IRA.

3.One aspect that makes a cash balance plan attractive to a small business owner, especially one who is older and perhaps behind on his retirement savings, is the high contribution levels that increase as you get older.


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