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Simple English definitions for legal terms
contributory pension plan
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A quick definition of contributory pension plan:
A contributory pension plan is a retirement savings plan where both the employer and employee contribute money. The employer and employee put money into the plan, which is invested to grow over time. When the employee retires, they receive regular payments from the plan based on how much money was contributed and how much it grew. This type of plan helps employees save for retirement and ensures they have income when they stop working.
A more thorough explanation:
A contributory pension plan is a type of pension plan where both the employer and the employee contribute. This means that both parties are responsible for funding the plan, which will provide retirement income to employees or result in a deferral of income by employees extending to the termination of employment or beyond.
For example, if an employee contributes a certain percentage of their salary to the pension plan, the employer will also contribute a matching amount. This ensures that the employee has a retirement fund that is funded by both themselves and their employer.
Other types of pension plans include:
- Defined-contribution pension plan: A pension plan where the employer and/or employee contribute a set amount of money to the plan, but the ultimate benefit is not guaranteed.
- Defined pension plan: A pension plan where the employer promises specific benefits to each employee.
- Noncontributory pension plan: A pension plan contributed to only by the employer.
- Nonqualified pension plan: A deferred-compensation plan in which an executive increases retirement benefits by annual additional contributions to the company's basic plan.
- Qualified pension plan: A pension plan that complies with federal law (ERISA) and thus allows the employee to receive tax benefits for contributions and tax-deferred investment growth.
- Top-hat pension plan: An unfunded pension plan that is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of managers or highly paid employees.
Overall, a contributory pension plan is a way for both the employer and employee to contribute to a retirement fund, ensuring that the employee has a source of income after they retire.