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What are Postretirement Benefits?

Felicia Dye
Felicia Dye

Postretirement benefits are used to help individuals care for their needs once they leave the workforce. To qualify, individuals are generally required to work for an employer for a certain number of years, and their departure from the workforce must be due to retirement. The most common of these types of benefits are pensions, but there may be others. Postretirement benefits may be fully funded by the company administering them, or recipients may be required to share the financial burden.

Pension plans provide retired individuals with regular income to replace the salary that they earned when they were working. While this is the most common type of benefit, people may receive others, such as medical plans, life insurance, or tuition assistance. Although there are costs associated with offering these additional benefits, they are considered non-cash perks and are generally classified as other postretirement benefits for accounting purposes.

A retired couple.
A retired couple.

A person cannot take advantage of postretirement benefits until she has successfully completed a certain term of service for an employer. Still, these benefits can be a major encouraging or discouraging factor for individuals who are considering whether to take a job. Pension is an especially important benefit for many individuals. Once they retire, if there are not adequate financial resources, there is a threat of becoming impoverished or incapable of maintaining the same standard of living that they had during their working years. Considering this, when choosing between job offers, many people will accept a position with a lower salary and postretirement benefits over a job with a higher salary but no such benefits.

Postretirement benefits can be a great financial burden for a company. In some cases, financial difficulty prompts companies to renegotiate, reduce, or completely eliminate these benefits. Being faced with the need to make these decisions can result in a wide range of problems for companies, including lawsuits and consumer backlash. In many cases, recipients are reliant on these benefits and expect to receive them for the rest of their lives.

Some companies ease their burden a bit by requiring individuals to bear some of the costs associated with these benefits. To receive pension, for example, an individual may have been required to contribute to a retirement plan while he was working. Medical plans that are provided by the former employer may require a retired person to pay a percentage of his health care bills or to remit a co-pay when he seeks care.

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    • A retired couple.
      A retired couple.