pension plan

noun
Updated on: 26 Jul 2017

Definition of pension plan

:an arrangement made with an employer to pay money to an employee after retirement

Word by Word Definitions

pension play
  1. : a fixed sum paid regularly to a person:

  2. : wage

  3. : a gratuity granted (as by a government) as a favor or reward

  1. : to grant or pay a pension to

  2. : to dismiss or retire from service with a pension

plan play
  1. : a drawing or diagram drawn on a plane: such as

  2. : a top or horizontal view of an object

  3. : a large-scale map of a small area

  1. : to arrange the parts of : design

  2. : to devise or project the realization or achievement of

  3. : to have in mind : intend

  1. : flat

  2. : flat and


Financial Definition of PENSION PLAN

pension plan

What It Is

A pension plan is an arrangement to provide employees with an income when they are no longer earning a regular income from employment.

How It Works

A pension plan is usually a type of retirement plan that gives employers the opportunity to make a contribution to a fund set aside for an employee's future benefit.  The pool of funds is invested on behalf of the employee, on a tax exempt basis, and is intended to yield a stream of payments to the employee upon retirement.

By allowing the employer to make the payment into the employee's pension plan in this way, the employee is deferring a portion of his or her income to a future time.

There are two main types of pension plans.  One type is defined-benefit plans, where the employee receives a specific amount upon retirement regardless of the performance of the investment pool.  The other type is a defined-contribution plan, where the employee receives an amount based on the performance of the investment pool.

In accordance with the US Internal Revenue Service code, the amount of the tax-exempt contributions into a pension plan is limited based on the income levels of the employee.

Why It Matters

Pension plans can include a variety of types of contributions in addition to cash payments.  For example, a pension plan may include profit-sharing plan, a stock bonus plan (usually deferred until retirement so that the contribution is taxed at the retirement tax rate) and even an employee stock ownership plan.


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