Pensions & Other Postretirement Benefits

After employees retire, they often live on a fixed income, which comes largely from a pension plan. Pensions are calculated on an employee's salary and how long he was with the company.
Many retirees receive benefits other than their pensions, and these are broadly referred to as other postretirement benefits.

Types of Pension Plans

There are two main types of pension plans: defined benefit and defined contribution plans.
In a defined benefit plan, employers guarantee that the employee will receive a certain amount of money and benefits upon retirement.
In a defined contribution plan, the employer promises to contribute a certain amount of money to the employee's plan, but the actual money the employee receives upon retirement depends on how well the investment does.
There are also integrated pension plans, which are tied to the employee's Social Security payments. The total benefit that the employee receives is based on how much Social Security the employee will receive after retirement.

Types of Other Benefits

Other benefits usually refer to noncash payments that retirees might receive in addition to their pensions. Most postretirement benefit packages include life insurance, medical plans and dental plans. Retirees help former employers with these costs by paying copays and deductions on these benefits.

Taxes

Retirees usually do not have to pay taxes on money they receive as part of their pension plans. Although it varies depending on the benefit, other benefits that that are not part of a pension plan will most likely be taxed. Many individual retirement investments, such as most types of IRA, are tax deductible.

Employer Obligations

If an employer offers a pension plan, they are obligated to contribute to a pool of funds dedicated to employees' retirement pension. The pool of funds is then invested on the employees' behalf, and the employee is entitled to the money when she retires.
If an employer offers a 401(k) plan, he can make contributions to the employee's account in addition to the money the employee puts into the account. Some employers match the amount of money the employee contributes to the 401(k).
If the employer offers a SEP or SIMPLE IRA, she is obligated to set that account up for the employer.

Employee Obligations

During work, the employer is responsible for knowing what kind of retirement plan his employer will provide and what kind of postretirement benefits he is likely to receive.
If the employee has a 401(k) account, she can designate a certain amount of money from her paycheck to go into that account.
If the employee decides to get an IRA (except for a SEP or SIMPLE IRA), he is responsible for setting the account up and contributing to it.