WHAT IS 'Unit Benefit Plan'

A unit benefit plan is an employer-sponsored pension plan that provides retirement benefits based on a dollar amount or, more typically, a percentage of the employee's earnings for each year of service.

BREAKING DOWN 'Unit Benefit Plan'

Unit benefit plans usually are based on a percentage ranging from 1.25-2.5 percent. When the employee reaches retirement, their years of service are multiplied by the percentage multiplied by the career average salary to determine the employee's annual retirement benefit. The unit benefit formula is used to calculate an employer's contribution to an employee's defined-benefit plan based on years of service. An advantage of this retirement plan contribution system is that employees are compensated for working longer at a company; however the employer incurs actuarial administrative costs.

For example, if an employee has 35 years of service with final average earnings of $120,000 and the unit benefit plan percentage is 2.0 percent, the employee's annual retirement benefit would be calculated as follows: years * average earnings * compensation percentage = annual retirement benefit. Applying this example to the calculation yields: 35 * 120,000 *.02 = $84,000.

Defined-benefit plan

A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and investment risk mangement for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

Defined-benefit plans, which include pension plans or qualified-benefit plans, are termed defined because employees and employers know the formula for calculating retirement benefits ahead of time. This fund is different from other pension funds, where the payout amounts depend on investment returns, and if poor returns result in a funding shortfall, employers must tap into the company’s earnings to make up the difference. Because the employer is responsible for making investment decisions and managing the plan's investments, the employer assumes all the investment risk. A tax-qualified benefit plan has the same characteristics as a pension plan, but it also gives the employer and beneficiaries additional tax incentives not available under non-qualified plans.

Qualified retirement plan

A qualified retirement plan meets the requirements of Internal Revenue Code Section 401a so is eligible to receive certain tax benefits. Such a retirement plan is established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income tax liability by reducing taxable income. Qualified retirement plans help employers attract and retain employees.

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