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Employee Benefit
Plans
Employee benefit plans
are very significant economic entities in the United
States today. There are approximately 700,000 pension
plans covering more than 90 million participants and
beneficiaries. In addition, there are approximately nine
million health and welfare benefit plans.
Employee benefit plans
own significant amounts of investments. Pension plans
own more than $4.3 trillion in assets. Plans that meet
numerous and complex tax qualification requirements do
not pay federal income taxes on the income their
investments generate; neither do the plan participants
pay taxes until they receive income in the form of
distributions from the plan. Participants in qualified
health and welfare benefit plans are not taxed on the
value of the benefits provided by the plan. In addition,
some types of employee benefit plans offer participants
tax exclusions for portions of their earnings they
contribute to the plan.
In the early 1970's,
there was great concern when participants in a large
unfunded pension plan lost their benefits due to the
plan sponsor’s bankruptcy. Also, it was not uncommon for
employees who worked many years to find that they could
not receive any of their accumulated plan benefits upon
retirement or termination because of their plans’ strict
vesting schedules. As a result, the Employee Retirement
Income Security Act of 1974 (ERISA) was passed to
provide minimum standards of vesting, funding, and
fiduciary behavior for pension and welfare benefit
plans. ERISA also established the Pension Benefit
Guaranty Corporation to insure benefits in case certain
types of pension plans were unable to meet benefit
obligations.
In addition, ERISA
established record-keeping and financial-reporting
responsibilities for plans and imposed a requirement for
plans with 100 or more participants to have an annual
audit of their financial statements. ERISA gave the
Department of Labor (DOL) and the Internal Revenue
Service (IRS) authority to issue regulations specifying
requirements for the financial records, tax return,
annual report, and audit. Those requirements include
financial statement requirements and audits in
accordance with generally accepted auditing standards (GAAS).
Employee benefit plans
may be broadly classified as either retirement plans or
health and welfare plans. Each of these two categories
may include either defined benefit or defined
contribution plans. For example, a retirement plan may
be either a defined benefit retirement plan (typically
called a pension plan) or a defined contribution plan.
There are several specific types of defined contribution
plans, such as profit-sharing plans, employee stock
ownership plans (ESOPs), and 401(k) plans. Health and
welfare plans may also be defined benefit or defined
contribution plans and may include specific types such
as medical, disability, or life insurance plans.
Client references
available upon request
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