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Federal Pensions: Civilian employees of the federal government are covered by one of two retirement programs, depending on the date of employment. The older program is the Civil Service Retirement System (CSRS); the newer is the Federal Employees Retirement System (FERS). Employees in service before January 1, 1983, were in CSRS and continue in it unless they voluntarily transfer to FERS. Employees hired after January 1, 1983, are in FERS. Employees in CSRS are not covered by Social Security. The CSRS pension benefit is considered generous in comparison to nongovernmental pension plans, in theory to make up in part for the absence of Social Security benefits. Participants in FERS are covered by Social Security, and the pension benefits in the defined benefit portion of FERS are relatively modest. There is a thrift plan available to FERS participants. CSRS members are in a good defined benefit pension plan and may participate in a modest thrift plan. FERS members are in a small defined benefit pension plan, may participate in a good thrift plan, and are covered by Social Security. The federal pension systems will accept a form of QDRO on the defined benefit pension plans and will accept an order on the thrift savings plan known as a retirement benefits court order.

Final Pay Plan: A defined benefit pension plan in which the benefit formula uses the pay from the last year or average of a fixed number of years before retirement. An example is the average of the highest five consecutive years' pay in the last ten years immediately preceding age 65. A final pay plan is in contrast to a career average pay plan in which 20 or 30 years of pay would be averaged in the pension benefit formula.

Floor Plan: A plan that serves to provide a minimum benefit if a second designated plan's benefit would otherwise be smaller. For example, a profit-sharing plan may provide that if the person's account when converted to a monthly pension would be less than the pension generated by a benefit formula, then the larger pension will be paid. The underlying benefit formula would be contained in the floor plan. If the floor plan benefit is smaller than the companion plan's benefit, then the floor plan benefit is ignored. This type of plan is also known as a floor-offset plan or an offset-floor plan. It should not be confused with an offset plan, which subtracts Social Security benefits and which has nothing to do with a floor plan.

Forfeiture: In a defined contribution plan, such as a profit-sharing plan, employees who leave without full vesting forfeit the nonvested portions of their individual accounts. These forfeitures are reallocated among the accounts of the remaining participants. However, the forfeitures may be held in a suspense account pending a formal break-in-service of the departing employee. If the employee returns to work within a specified time period, the account balance is restored. Otherwise, the forfeiture is imposed and redistributed. In a defined benefit pension plan, nonvested amounts are not specifically identified. Forfeitures of employees who leave with less than full vesting are benefits not paid, so the funds remain invested in the pool of plan assets. Remaining participants do not benefit from forfeitures in a defined benefit plan. Vested amounts in any type of plan are usually nonforfeitable with special exceptions. In a non-ERISA plan, otherwise vested benefits may be forfeited for various reasons. Forfeitures of vested benefits in an ERISA plan are quite rare.

Forms of Pension Annuity: A qualified defined benefit pension plan generally offers several forms of pension annuity to a retiring employee. In actuarial mathematics, the forms of payment are equivalent to each other, but for any particular employee one form of payment may be preferable to the others. Examples of the dollar amounts of optional forms of pension benefits are set forth below for a typical male employee retiring at age 65 with a wife age 60.

  1. Straight life or life only - The retiree's pension is paid in full according to the plan's benefit formula. The pension stops when the retiree dies and there are no death or survivor benefits. The pension benefit is $1,000 per month.
  2. Life with ten years certain or life with 120 monthly payments guaranteed - The retiree receives a reduced pension payable as long as he lives. If the retiree dies within the first ten years of retirement, before 120 monthly pension payments have been made, the balance of the ten years' worth of payments is paid to his beneficiary or beneficiaries. If the retiree lives more than ten years after retirement, his pension ceases at death with no further benefits due. Note that the employee may have named any number of beneficiaries or contingent beneficiaries. The pension benefit is $910 per month.
  3. Ten-year certain only - The retiree's pension is increased, and the pension benefit is paid for exactly ten years. The plan guarantees 120 monthly pension payments, whether the retiree is alive or dead. Any number of beneficiaries may be named. The pension benefit is $1,200 per month, greater than the monthly straight life pension because the same value is paid out in ten years instead of being stretched out over the retiree's lifetime.
  4. 100 Percent Joint-and-Survivor - The retiree's pension is reduced, based on the age of the beneficiary (survivor), a specific individual named to receive pension payments after the death of the retiree. Upon the death of the retiree, the survivor beneficiary receives the same (reduced) amount (100 percent) that the retiree was receiving. If the beneficiary dies first, there is no replacement. In some plans, a "pop-up" version allows the retiree's pension to be restored to its full amount if the beneficiary dies first. The pension benefit is $800 per month.
  5. 50 Percent Joint-and-Survivor - The retiree's pension is reduced, based on the age of the beneficiary (survivor). The same conditions apply as in the 100 percent J&S annuity described above. Upon the death of the retiree, the survivor beneficiary receives one-half (50 percent) of the reduced amount that the retiree was receiving. A smaller reduction in the retiree's benefit is required because only one-half of the pension is paid to the beneficiary. The pension benefit is $850 per month.
  • The examples given above are illustrative only. The amounts (exact and relative to each other) will vary with the particular pension plan and with differences in the ages of the individuals, as well as with the sex of the retiree.

GATT: (General Agreement on Tariffs and Trade): The international negotiations concerning the General Agreement on Tariffs and Trade (GATT) were conducted in a series of meetings and agreements known as "rounds." In December 1994 Congress passed H.R. 5110 as Pub.L. No. 103-465 to implement the Uruguay Round. When Congress passed the Uruguay Round, the bill included pension provisions that originally had been drafted as a separate bill. These pension provisions were included in GATT, applicable to United States pension plans only, under the theory that they would produce a net revenue gain that would offset anticipated losses from GATT's trade provisions. The pension bill embedded in GATT became law under a congressional "fast track" allowing no chance for alteration.

  • The pension provisions are found in Title VII, Subtitle F, Part I of Subpart C, Section 767. The embedded pension provisions are labeled "The Retirement Protection Act of 1994." The mortality table prescribed therein is the 1983 Group Annuity Mortality (GAM) Table, as spelled out in Revenue Ruling 95-6.
  • The pension provisions in GATT prescribe the interest rates to be used in defined benefit pension plans as the smoothed average of 30-year U.S. Treasury bonds. In technical detail, that means the 30-year constant maturity rate that is interpolated from the daily yield curve, which relates the yield on a security to its time to maturity and which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market.
  • The rates thus derived are reported weekly in a Federal Reserve Statistical Release known as "Selected Interest Rates," with yields shown in percent per annum. Each release lists 39 different interest rates, of which only the 30-year constant maturity rate is of concern to pension practitioners.

Integrated Plan: A plan that recognizes either benefits or contributions under Social Security. Taking into account Social Security benefits results in more benefits for the higher paid and reduced benefits for the lower paid in an allowable difference. A plan with this feature is said to be integrated or to contain a permitted disparity.

Interest Rates: In a defined contribution plan, the interest or investment gains earned are credited to the individual account. In a defined benefit pension plan, the pension benefit is determined by a formula in the plan without regard to the investment earnings of the plan assets. To compute the present value of a pension in a defined benefit pension plan, it is necessary to use a set of interest rates to discount future potential payments to their present worth. This does not affect the benefit as a payment; it concerns its value or what it would cost to purchase an annuity. In actuarial mathematics, the present value of a future financial obligation is very sensitive to interest rates. A standard inverse relationship exists: The interest rates and the present values move in opposite directions. A lower interest rate produces a higher present value, and a higher interest rate produces a lower present value. Standard interest rate assumptions are available on a current basis, updated monthly, from the Federal Reserve Board.

Internal Revenue Code: The Internal Revenue Code (Code; IRC) covers qualified ERISA plans in Section 401(a), tax-sheltered annuities in Section 403(b), profit-sharing plans that have a salary reduction feature and are with or without matching employer contributions in Section 401(k). Section 401(k) also covers thrift and savings plans that have pretax employee contributions. All Section 401(k) plans are defined contribution plans.

Investment Gain and Loss: Individual accounts in a defined contribution plan are credited or debited with investment gains and losses usually once a year, but sometimes quarterly or even monthly. The investment results posted to the accounts include realized and unrealized performance. In other words, so-called paper gains and losses are included even though they are not actual in the absence of a transaction. When a QDRO is served on a defined contribution plan, it should indicate whether unrealized performance is to be taken into account in the award to the alternate payee.

Investment Risk: Investment risk in a pension plan means who benefits and who loses when investments of the plan perform more or less well. Investment risk depends on the type of plan. In a defined benefit pension plan, the employer bears the investment risk. If the plan's assets perform very well, the employer may reduce its annual contributions to the plan. If the plan's investments fare poorly, the employer must make up the investment losses with larger contributions. It is not an exact dollar-for-dollar match in the year of occurrence. The enrolled actuary for the plan measures the investment gain or loss and advises the employer on contribution levels to spread out the adjustment over several years. In a defined contribution plan, the employee bears the investment risk. If the investments of a profit-sharing plan, target benefit plan, or money-purchase pension plan suffer, so does the employee's individual account.

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