Legal Definitions - noncontributory pension plan

A noncontributory pension plan is a type of retirement savings program where an employer fully funds the plan without requiring any financial contributions from its employees. In such a plan, employees accrue retirement benefits solely based on factors like their years of service and salary, with the employer bearing the entire cost of funding these future payments.

• Example 1: "Apex Gears Inc.," a long-standing manufacturing company, offers a pension plan to all its employees. Under this plan, employees do not see any deductions from their paychecks for retirement savings. Instead, Apex Gears Inc. makes all the necessary contributions to a fund that will pay out a defined monthly benefit to employees once they retire, based on their final salary and how long they worked for the company.

  Explanation: This is a noncontributory pension plan because the employees at Apex Gears Inc. are not required to contribute any of their own money. The company, Apex Gears Inc., bears the full financial responsibility for funding the retirement benefits.

• Example 2: The City of Metropolis provides a retirement system for its police officers and firefighters. The officers and firefighters receive a pension upon retirement, calculated based on their rank and years of service. The city government covers all the costs associated with funding these pensions; the employees' paychecks are not reduced to contribute to this specific retirement fund.

  Explanation: This illustrates a noncontributory pension plan because the police officers and firefighters do not make direct financial contributions from their salaries to fund their pensions. The City of Metropolis is solely responsible for funding these retirement benefits.