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Contributory Plan. Requires the employer to withhold a portion of each employee's earnings a contribution to the plan.

Non contributory Plan. Requires the employer to bear the entire cost of the plan.

Funded Plan. Requires the employer to set aside funds to meet future pension benefits by making payments to an independent funding agency The funding agency is responsible for managing the assets of the pension fund and for disbursing the pension benefits to employees. For many pension plans, insurance companies serve as the funding agency.

Unfunded Plan. Managed entirely by the employer instead of by an independent agency.

Qualified Plan. Designed to comply with federal income tax requirements. Plans meeting these requirements allow the employer to deduct pension contributions for tax purposes and exempt the pension fund income from tax. Also, employer and employee contributions are not taxable to the employees until benefits are received. Most pension plans are qualified.

Unqualified Plan. Not designed to comply with federal income tax requirements.

Defined Contribution Plan. Requires the employer to contribute an annual amount determined in the current year on the basis of agreements between the company and its employees or resolution of the board of directors. Retirement payments will depend on the amount of pension payments the accumulated contributions can support.

Defined Benefits Plan. Employer required annual contribution is the amount required to fund pension liabilities that arise as a result of employment in the current year but whose amount will not be finally determined until the retirement and death of the persons currently employed. Retirement payments depend on a fixed amount of future benefits but uncertain current contributions (vs. defined contribution plan where the uncertain future amount of pensions liabilities depends on the cumulative amounts of fixed current contributions).

Projected Benefit Obligation. Actuarial present value of all benefits attributed by the pension benefit formula to employee services rendered prior to that date.

Accumulated Benefit Obligation. Present value of the benefits accrued to date based on past and current compensation levels.

SFAS 87: "Employers' accounting for Pensions" Assumption: A defined benefit pension plan is part of an employee's compensation incurred when the services provided to the employer by the employee are rendered.

Allows for:

l.Delayed recognition of certain events Certain changes in the pension obligation and in the value of the plan assets are not recognized as they occur. They are recognized on a systematic and gradual basis over subsequent accounting periods.

2.Reporting of net cost Various pension costs (service cost, interest expense, etc.) are accounted for as one expense.

3.Offsetting of assets and liabilities Recognized value of plan assets contributed to the plan is offset in the statement of financial position against the recognized liabilities.

Components of Pension Expense (Net periodic pension cost)

· Service cost-Present value of amount to be paid in the future to employees in return for their current services. Calculated according to plan's benefit formula (provided by actuary).

· Interest expense-Since compensation is in effect a "loan" from the employee to the employer, interest will accrue and may be a component of pension cost. -PRO X Discount rate used by company.

· Return on Assets - A possible negative component of pension cost as employers invest pension contributions into a fund with the intent to earn a return. =FV at the end of the period -FV at the beginning of the period -Contributions to plan assets +Benefits paid to employees

· Prior Service Cost-When a plan begins or is altered, additional benefits are due to employees for their service performed in previous years. Part of all of this cost maybe included in pension cost. This cost is amortized by assigning an equal amount to each fixture period of service of each active, participating employee at the date of the amendment who is expected to receive future benefits under the plan (or simple straight line amortization).

· Gains and Losses-Unforeseen events related to a pension plan which result in (I) deviations in the current period between actual experience and the assumptions used and (2) changes in the assumptions about the future. Generally consists of two of the following:

l.amortization of any unrecognized net gain from previous periods (deducted from pension expense) or

2.amortization of any unrecognized net gain from previous periods (deducted from pension expense) and

3.actual return on plan assets in excess of actual return for the current period (added to pension expense) or

4.expected return on plan assets in excess of actual return for the current period (deducted from pension expense) NOTE: Gains and losses can only be amortized if they exceed 10% of the greater of actual projected benefit obligation or the fair value of the plan assets.

· Amortization of SFAS 87-Any unrecognized liability or asset that exists from the initial application of SFAS 87. Amortization of net obligation (asset) increases (decreases) pension expense.

Pension Expense (Net Periodic Pension Cast) Service Cost + Interest Cost - Actual return on plan assets + Amortization of prior service cost +/-Gain or Loss +/-Amortization of SFAS 87 NOTE: In unusual cases negative actual return would be added and the amortization of prior service cost would be deducted.

SFAS 88 Definitions

Settlement. An irrevocable action that relieves the employer of the primary responsibility for a PBO and eliminates significant risks related to the pension obligation and the assets used to effect the settlement.

Curtailment An event that significantly reduces the expected years of future service of current employees or eliminates, for a significant number of employees, the accrual of defined benefits for some or all of their future service.

Termination Benefits Benefits provided to employees in connection with their termination of employment.


I. Which of the following measures of an employer's pension obligation under a defined benefit plan will result in the largest measurement off the liability?
a. Vested benefits pension obligation
b. Unvested benefits pension obligation
c. Projected benefit obligation
d. Accumulated benefit obligation

2. The Accumulated Pension Obligation of a company includes benefit obligation to employees at salary levels.
a- Vested
b. Vested
c. Vested and nonvested
d. Vested and nonvested

List B

3. An employee's right to obtain pension benefits regardless of whether she remains employed is known as his/her
a. Prior service cost
b. Defined benefit plan
c. Vested interest
d. Minimum liability

4. A company which sponsors a defined benefit plan for its employees should disclose the (a) Fair market value of plan assets available for benefits. (b) Amount of unrecognized prior service cost.
a. Both the (a) and the (1,).
b. The (a) but not the (b).
c. The (b) but not the (a).
d. Neither the (a) nor the (b).

5. An actuary has determined that a company should have $90,000,000 accumulated in its pension fund twenty years from now in order for the fund to be able to meet its obligations. An interest rate of8% is considered appropriate for all pension find calculations involving an interest component. The company wishes to calculate how much it should contribute to the pension find at the end of each of the next twenty years m order for die pension fund to have its required balance in twenty years. Assume you are given the following two factors from present value/future value tables:
I.Factor for present value of an ordinary annuity for n=20, 1=8% 2. Factor for future value of an ordinary annuity for n=20, 1=8%

Which of the following sets of instructions correctly describes the procedures necessary to compute the annual amount the company should contribute to the fluid?
a. Divide $90,000,000 by the factor for present value of an ordinary annuity for n=20, 1=8%.
b. Multiply $90,000,000 by the factor for present value of an ordinary annuity for n=20, 1=8%.
c. Divide $90,000,000 by the factor for future value of an ordinary annuity for n=20~ 1=8%.
d. Multiply $90,000,000 by the factor for future value of an ordinary annuity for n=20, 1=8%

6. The present value of future benefits payable as a result of work done before the start of or change in a pension plan is the definition of
a. Minimum liability
b. Fair value of plan assets
c. Projected benefit obligation
d. Prior service cost

7. At December31, 1997,acompanyhada following data relating to its defined benefit pension plan: Total fair value of plan assets $1,800,000 Accumulated benefit obligation 2,600,000 Projected benefit obligation 3,100,000 In its December 31, 1997 balance sheet, the company should report a minimum liability relating to the pension plan of
a. $500,000
b. $800,000
c. $1,300,000
d. $2,600,000

8. In what type of pension plan does die employee get the benefit of gain or the risk of loss from contributed assets?
a. Mutual fund
b. Real estate trust
c. Defined benefit
d. Defined contribution

9. Under a defined contribution pension plan, a(n) is reported on the balance sheet only if the amount the organization has contributed to the pension trust is the amount required.
List A
a. Asset
b. Asset
c. Liability
d. Liability

List B
Greater than
Equal to
Great to
Equal to

Answers I. C 2. C 3. C 4. A S. C 6. D 7. B 8. D 9. A

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