Page 88 - Group Insurance and Retirement Benefit IC 83 E- Book

have formal pension plans but which discriminately give pensions to former employees

charge on the books the amount of these pensions paid. Similarly, the companies which
have adopted formal plans but do not choose to fund them also charge on their books the

amounts actually paid to the pensioners.

Today, most major companies have funded pension plans for which contributions are
made in advance of the retirement of the individual employees. The amount of these

contributions is charged as an expense as they are paid.

With the unfunded plan, or pay-as-you-go plan, the amount charged as an expense for the

year will be the actual payments to the pensioners and, generally, is not subject to change

by the corporation except in unusual circumstances. On the other hand, for plans which
are being funded in advance, the corporation is generally allowed considerable latitude in

the amount to be contributed during the year. This is particularly true for many large
corporations where substantial funds have been built up in the past to meet pension

liabilities. The corporation may use prior contributions to cover current costs. In this way,
it is possible to eliminate contributions entirely for a year or more.

At the other extreme, the Internal Revenue Service allows corporations to contribute on
tax-deductible basis contributions up to the amount of the normal cost plus i0 per cent of

the past-service cost in most instances. Thus the level of the contributions in any specific
year and the corresponding charge on the company's books are to a considerable extent

within the control of the company. In addition, the actuary's choice of the assumptions
and methods used to value the plan affect the range of the amount that can be contributed

on a tax-deductible basis.

The amount charged to pensions during the year, on a condensed income and outgo
statement furnished the stockholders, generally will be included with other payroll items.

Thus the amount charged to pension plans is not shown separately on the outgo
statement. Many companies, however, do show the amount separately in the footnotes

along with any remaining unfunded past-service costs. The term "unfunded past-service