Definition of pension plan
:an arrangement made with an employer to pay money to an employee after retirement
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pension plan
noun
Updated on: 26 Jul 2017
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Word by Word Definitions
pension
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: a fixed sum paid regularly to a person:
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: wage
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: a gratuity granted (as by a government) as a favor or reward
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: to grant or pay a pension to
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: to dismiss or retire from service with a pension
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plan
play
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: a drawing or diagram drawn on a plane: such as
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: a top or horizontal view of an object
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: a large-scale map of a small area
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: to arrange the parts of : design
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: to devise or project the realization or achievement of
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: to have in mind : intend
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: flat
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: flat and
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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.
Source: Investing Answers
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