Non-Contributory Plan refers to a pension plan which is totally and completely funded by the government and/or the employer and provided as a long term benefit plan. The employee doesn’t contribute to it. They are considered as fringe benefits. It is set up by the organization on behalf of their employees.
The employer has to keep a record of all the employees who are covered under insurance. These employees receive a certificate of insurance, which defines their rights and benefits. The employer bears the entire premium amount. Many companies follow this plan.
Example: In Florida, the law requires 100% participation by all the eligible employees in the Non-Contributory Plan (group life insurance plans).
Steps in a Non-Contributory Plan:
• Enrollment: It begins with employment and it is non voluntary, thereby being mandatory for all. The organization calculates the benefits provided based on the employees’ tenure and salary.
• Monthly contributions: No monthly contribution has to be made. The company calculates the expected future income benefit by looking at the employee’s years of service, job classification and salary. This plan uses percentage of the annual income of the employee to find out the benefit amount.
• Vesting period: Both non-contributory and contributory requires the employees to complete a certain number of years with the organization to receive the benefits at the end of that period. If an employee leaves the organization before being vested, then he/she is ineligible to receive any of these benefits.
• Contribution limits: The limit of these contributions is generally defined by the employer and may change depending upon the retirement age of the employee and his years of service to the company.
Advantages of Non-Contributory Plans:
• Employees earn some coverage without leaving an impact on their paychecks as the employer bears the entire amount of such a plan.
• Low wage employees receive the same employer provided health plan as the high salary employee.
• It has much less paperwork, cost and administration involved on the part of the organization, as compare to contributory plans.
Disadvantages of Non-Contributory Plans:
• The amount of coverage that the employees receive is limited.
• The contribution made by the employer is small and is less comprehensive.
• Employees may also be liable to pay taxes on these benefits in some cases.