Unit Benefit Plan – Definition

Cite this article as:"Unit Benefit Plan – Definition," in The Business Professor, updated September 20, 2019, last accessed August 13, 2020, https://thebusinessprofessor.com/lesson/unit-benefit-plan-definition/.

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Unit Benefit Plan Definition

A unit benefit plan is a plan that determines how much an employee will be paid in an employer-sponsored plan. This also determines the amount of money that an employer will contribute to benefit plan. The unit benefit plan calculates the dollar amount that employees will receive, this might be a percentage of their earnings in the year of service.

A Little More on What is a Unit Benefit Plan

Typically, a unit benefit plan determines the amount employees will receive based on a percentage. The percentage ranges from 1.25% – 2.5%. The percentage chosen in the benefit plan determines how much an employee would receive. Usually, at the time of retirement, the active years of service of an employee is multiplied by the predetermined percentage, then multiplied by the career average salary. That is;

Years of service /percentage /career average salary.

The unit benefit formula is used to calculate how much an employer contributes to an employer-sponsored pension plan or employee’s defined-benefit plan. Through the pension plan, faithful employees are compensated for their active years in the company.

Defined-benefit plan

A defined-benefit plan is a retirement plan sponsored by an employer. In this benefit plan, an employee is paid a pension payment, usually a lump sum of money contributed by the employer. There is a formula used in calculating an employee’s benefit, it is based on factors such as employee’s earnings history, years of service and age.

Employers and employees know how to calculate retirement benefits in Defined-benefit plan before time, this is why they are termed ‘defined’. Pension plans and qualified benefit plans are examples of defined-benefit plan.

Qualified Retirement Plan

A qualified retirement plan is also an employer-sponsored pension plan that is given to employees who have contributed significantly to the company. This retirement plan aligns with the stipulations of Section 401a of the Internal Revenue Code, this is why it has certain tax benefits. Employers who contribute in Qualified retirement plans enjoy tax exemption on the contributions made.

Also, a qualified retirement plan can reduce the taxable income of employees.

References for “Unit Benefit Plan

https://www.investopedia.com › Personal Finance › Retirement Planning › Pensions

https://www.insuranceopedia.com/definition/4725/unit-benefit-plan

https://www.allbusiness.com/barrons…/dictionary-unit-benefit-plan-4945986-1.html

www.businessdictionary.com/definition/unit-benefit-formula.html

Academic research for “Unit Benefit Plan

 Reversions of excess pension assets after takeovers, Pontiff, J., Shleifer, A., & Weisbach, M. S. (1990). Reversions of excess pension assets after takeovers. The RAND Journal of Economics, 600-613.

Pension reversions and worker-stockholder wealth transfers, Petersen, M. A. (1992). Pension reversions and worker-stockholder wealth transfers. The Quarterly Journal of Economics, 107(3), 1033-1056.

Pension accumulation as a semi-Markov reward process, with applications to pension reform, Balcer, Y., & Sahin, I. (1986). Pension accumulation as a semi-Markov reward process, with applications to pension reform. In Semi-Markov Models (pp. 181-199). Springer, Boston, MA.

Tax Qualified Retirement Plans for Professional Practitioners: A Comparison of the Self-Employed Individuals Tax Requirement Act of 1962 and the Professional …, Grayck, M. D. (1963). Tax Qualified Retirement Plans for Professional Practitioners: A Comparison of the Self-Employed Individuals Tax Requirement Act of 1962 and the Professional Association. Columbia Law Review, 63(3), 415-434.

[PDF] Funding and asset allocation in corporate pension plans: An empirical investigation, Bodie, Z., Light, J. O., & Morck, R. (1987). Funding and asset allocation in corporate pension plans: An empirical investigation. In Issues in pension economics (pp. 15-48). University of Chicago Press.

A stochastic theory of pension dynamics, Balcer, Y., & Sahin, I. (1983). A stochastic theory of pension dynamics. Insurance: Mathematics and Economics, 2(3), 179-197.

The effect of voluntary termination of overfunded pension plans on shareholder wealth, VanDerhei, J. L. (1987). The effect of voluntary termination of overfunded pension plans on shareholder wealth. Journal of Risk and Insurance, 131-156.

The Recapture of Excess Pension Assets., VanDerhei, J. L. (1985). The Recapture of Excess Pension Assets. Benefits Quarterly, 1(3).

The Economic Growth and Tax Relief Reconciliation Act of 2001 and Private Pension System Reform, Zhang, Y. (2002). The Economic Growth and Tax Relief Reconciliation Act of 2001 and Private Pension System Reform. U. Pa. J. Lab. & Emp. L., 5, 629.

Qualification of Pension and Profit-Sharing Plans, Forseter, B. (1971). Qualification of Pension and Profit-Sharing Plans. The Tax Lawyer, 333-346.

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