What is an Accumulation Plan [Internal Revenue]? A Comprehensive Guide
Definition & Meaning
An accumulation plan is a type of defined benefit plan used in retirement planning. Under this plan, the benefits for each employee are calculated separately for each plan year. The calculation is based on the employee's compensation for that year, especially if benefits are a percentage of their earnings rather than a fixed dollar amount. At the end of each plan year, an employee's total accrued benefit is the sum of their benefit for that year and their accrued benefit from the previous year.
Legal Use & context
Accumulation plans are primarily used in the context of retirement and pension law. They fall under the regulations set forth by the Internal Revenue Service (IRS) and are relevant for employers offering retirement benefits to their employees. Legal professionals may encounter accumulation plans in various contexts, including corporate law, employment law, and tax law. Users can manage related forms and documents using templates from US Legal Forms, which can help simplify the process of setting up or modifying such plans.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company offers an accumulation plan where an employee earns a benefit equal to 5 percent of their salary for each year worked. If the employee's salary is $50,000 in year one, they accrue $2,500 in benefits. In year two, if their salary increases to $55,000, they accrue an additional $2,750. Their total accrued benefit at the end of year two would be $5,250.
Example 2: An employee who has been with a company for three years has a total accrued benefit of $10,000 at the end of year three. If they earn $60,000 in year four and the plan continues to provide 5 percent of their salary, they would accrue an additional $3,000, bringing their total to $13,000 at the end of year four. (hypothetical example)
Relevant laws & statutes
Pursuant to 26 CFR 1.401(a)(4)-12, accumulation plans must adhere to specific IRS regulations regarding benefit calculations and accruals. These regulations ensure that plans are fair and equitable for all employees participating in the plan.