Non-Contributory Pension Plan

Posted in Human Resources Terms, Total Reads: 1232

Definition: Non-Contributory Pension Plan

Non-Contributory pension 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 the non-contributory pension plan. They are considered as fringe benefits. It is set up by the organization on behalf of their employees.

Importance of Non-Contributory Pension Plan

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 under the non-contributory pension plan. The employer bears the entire premium amount. Many companies follow this type of a pension plan. Some other types of pension plans are defined benefit pension plan, defined contribution pension plan, simplified employee pension plan etc.

Example: In Florida, the law requires 100% participation by all the eligible employees in the Non-Contributory Pension Plan (group life insurance plans).

Non-Contributory Pension Plan Steps

Some of the steps in a Non-Contributory Plan:

1. 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.

2. 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.

3. 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.

4. 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 & Disadvantages of Non-Contributory Pension Plan

Advantages of Non-Contributory Plans:

1. Employees earn some coverage without leaving an impact on their paychecks as the employer bears the entire amount of such a plan.

2. Low wage employees receive the same employer provided health plan as the high salary employee.

3. Non-Contributory Pension Plan has much less paperwork, cost and administration involved on the part of the organization, as compare to contributory plans.

Disadvantages of Non-Contributory Plans:

1. The amount of coverage that the employees receive is limited in Non-Contributory Pension Plan.

2. The contribution made by the employer is small and is less comprehensive.

3. Employees may also be liable to pay taxes on these benefits in some cases.

Hence, this concludes the definition of Non-Contributory Pension Plan along with its overview.

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