Integrated Pension Plan

What Is an Integrated Pension Plan?

An integrated pension plan is an employer-based pension plan where the employer counts Social Security benefits as part of the total benefit that the plan participant receives. Said another way, employers that use an integrated plan reduce the pension benefits that their employees receive by a percentage of the amount that they receive in their Social Security check. If the pension plan were not integrated, employees would receive a greater sum of money from their employer.

Understanding Integrated Pension Plans

A pension plan is a type of retirement plan in which the employer is responsible for making contributions to the employee's retirement plan. The pension plan is a pool of money that's set aside to pay the employees a monthly benefit when they retire. The money is invested on the employee's behalf, and any earnings on those investments are used to pay the employee their retirement income. Pension plans have largely gone away due to the financial cost and responsibility that the employer has for their worker's retirement benefits.

An integrated pension plan factors in the employee's Social Security benefits into the formula for determining their pension benefits. As a result, an integrated pension plan is less costly and less financially burdensome for the employer.

Integrated pension plan participants collect from their employer as well as Social Security. Some integrated plans have a specified total benefit in mind when determining payout; these plans look for Social Security and pension funds to combine toward meeting that goal.

Employees do have some protection, though. According to a 1986 law, an employer that enrolls employees in an integrated pension plan cannot reduce private pension distributions by more than 50%.

Why Integrated Pension Plans Are Used

Several factors likely play a role in a firm’s decision to adopt an integrated pension plan. First, there are several payroll considerations that accompany an integrated pension plan; in particular, firms can reduce their required OASDI payment. OASDI (old age, survivors, and disability insurance) is the payroll tax that employers collect from employees to fund the nation’s social security program. Employers withhold 6.2% of their employees' pay and then forward it to the government. For their part, employers must also pay 6.2% from their own funds. With pension integration, firms can offset part of this tax by reducing employee pension benefits.

Second, a non-integrated pension plan could result in lower-paid workers receiving combined pension and Social Security benefits that exceed their pre-retirement earnings, which could be considered unfair. Third, firms may view an integrated plan as a recruiting tool to attract and retain talented personnel. The thought is that integration could allow for higher pension benefits, within limits, for higher-paid workers.

Advantages and Disadvantages of Defined Benefit Plans

Defined benefit pension plans offer participants security, in that they know their income stream upon retirement. Also, the Pension Guaranty Corporation (PBGC) protects the administration of their defined benefit plans. If something happened to the company, the PBGC would step in and cover pension distributions.

A disadvantage of a defined benefit pension plan is that a participant’s income potential may be limited. For example, a 401(k) plan participant would be able to choose individual investments that may lead to higher annual returns. Along those lines, another potential disadvantage of defined benefit pension plans is that participants do not have control over the investments.