Retirement Program: Review for Federal Compliance by FY97

Like many other universities, Penn must examine possible changes to its retirement program because of changes in federal tax law.

The University has been advised by both its actuaries and benefits consultants that the present retirement program will not comply with federal tax law beginning July 1, 1997. The laws are very complicated, and in order to comply with the new tax provisions, Penn needs to insure that it offers "comparable" benefits programs to various employee groups, including employees of both the University and the Health System.

Given the numerous organizational units and multiple employee groups of the University, Penn, like many other employers, has utilized both a defined benefit plan (a retirement program that provides a fixed retirement benefit based on a formula) and a defined contribution plan (a certain percentage of pay is contributed throughout the employment term of the faculty or staff member) to help support retirement needs of faculty and staff.

Compounding the issue is the government's requirement that the University and its Health System be treated as a single entity for plan comparability purposes. The University and the Health System have had significant independence in providing pension benefits to their respective employees under prior law. The new law allows each group to maintain its own retirement program but requires the plans to be developed and assessed in a coordinated fashion.

In order for the pension plans to be "qualified" by the government and eligible for tax-exempt status, they must meet specific provisions of the Internal Revenue Code. It is imperative that Penn's pension plans maintain their qualified status with the IRSotherwise, plan benefits become immediately taxable to plan participants. For-profit organizations were required to modify their pension plans in 1994. Tax-exempt organizations, like Penn, have until 1997 to comply with the new laws.

While the review of the retirement plan is a result of changing government regulations, it is also an opportunity to revisit and assess the plan's objectives. The retirement plan is one of the most important expenditures in our overall benefit plan. The retirement program is one component of Penn's benefit package that a faculty and staff committee will review during the next year to insure compliance with the law. The committee, with input from many individuals and groups, will also review design effectiveness of the University's overall benefit plan.

Implementation of approved changes will begin in July 1997.

--Clint Davidson, Vice President for Human Resources


Volume 42 Number 32
May 14, 1996

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