Understanding Contributory Plans

Contributory plans present some special considerations when you implement Pension Administration.

  1. If you use PeopleSoft HR: Manage Base Benefits and PeopleSoft Payroll for North America, you need to establish deduction processing in order to take pension contributions from employee paychecks.

  2. You need to track the contributions and interest that employees earn.

  3. You need to determine how much of the final benefit is attributable to the employee contributions, and treat the employee-paid and employer-paid benefits differently. For example:

    1. Vesting: Employees are always 100 percent vested in their contributions, while the employer-paid portion of a benefit is subject to plan vesting rules.

    2. Of the 415 limits on defined benefit plans: You only apply the limits to the employer-paid portion. (Employee contributions, mandatory or voluntary, are considered a defined contribution plan.)

    3. Optional forms of payment: Employees may be entitled to withdraw contributions as a lump sum at benefit commencement, leaving the employer-paid portion to be paid out as an annuity.

  4. You need to keep track of the final employee contributory balances against benefits that are received, because employees are entitled to full recovery of their contributions. Furthermore, any after-tax contributions are recovered as nontaxable benefits, while the interest is taxable.

  5. Contributory plan participants can often withdraw their contributions when they terminate, forfeiting any associated service. Then, if an employee is rehired, the plan may enable the employee to repay the contributions with interest in order to buy back the forfeited service.

  6. Contributory plans may enable employees to purchase service for certain types of periods, such as time worked under another plan, or time spent on military leave. To purchase the service, employees must give the plan an amount of money that is equivalent to what they would have contributed had they been participating during that time. The purchase amount also includes appropriate interest.