Overfunded Pension Plan

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Definition of 'Overfunded Pension Plan'

An overfunded pension plan is a pension plan in which the assets exceed the liabilities. This can happen when the plan's investments perform well, or when there are fewer retirees than expected.

There are a few different ways to measure the funding status of a pension plan. One common measure is the funded ratio, which is the ratio of plan assets to plan liabilities. Another measure is the surplus ratio, which is the difference between plan assets and plan liabilities.

If a pension plan is overfunded, it has several options for what to do with the excess assets. One option is to invest the assets in order to generate additional income for the plan. Another option is to use the assets to reduce future contributions or to increase benefits.

There are a few potential risks associated with an overfunded pension plan. One risk is that the plan's investments may not perform as well as expected, which could lead to a decrease in the funded ratio. Another risk is that the plan may be subject to a higher level of regulatory scrutiny.

Overall, an overfunded pension plan can be a positive thing for the plan's participants. It provides the plan with additional financial security and can help to ensure that the plan is able to meet its obligations to its participants.

Here are some additional details about overfunded pension plans:

* The Pension Protection Act of 2006 (PPA) requires that all pension plans be at least 80% funded. However, some plans may be allowed to be less than 80% funded if they meet certain criteria.
* The PPA also imposes a number of other requirements on overfunded pension plans. For example, overfunded plans must make annual contributions to a funding stabilization reserve.
* The PPA provides a number of tax incentives for overfunded pension plans. For example, overfunded plans may be able to claim a deduction for certain contributions to the funding stabilization reserve.

Overall, overfunded pension plans can be a complex and challenging topic. However, it is important for plan sponsors and participants to understand the basics of overfunded pension plans in order to make informed decisions about their retirement savings.

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