4- Defined Contribution vs. Defined Benefit Structures Flashcards
A defined contribution plan is top-heavy in a plan year if, as of the determination date, either: (2)
- sum of the account balances of all _______ participating in the plan is more than ___% of the account balances for all covered employees
- The plan is part of a _______
- key employees
- 60%
- top-heavy group.
The nondiscrimination requirements of the IRC could be easily circumvented if employers were given complete flexibility in splitting employees among _________
a number of subsidiaries.
the controlled group rules can result in the aggregation of employee groups for qualification testing purposes that would otherwise be considered ______. However, an employer may be able to test a plan in a controlled group separately if it can show that the employees covered by the plan are in a ________
separate
qualified separate line of business (QSLOB).
While the employer may reserve the right to amend or terminate the plan at any time, it is expected that the plan will be established on a permanent basis. If a plan is terminated for any reason other than business necessity within a few years after it is established, this will be considered as evidence that the plan, from its inception, was not a bona fide plan designed for the benefit of employees. This could result in adverse tax consequences.
plan permanency requirements
ever since the passage of the employee retirement income security Act (ERISA), a defined benefit plan exposes an employer to significant financial liability if the plan is terminated when there are _______ for vested benefits. An employer’s ______ is subject to a lien in favor of PBGC if necessary to meet any liabilities assumed by PBGC in this event.
Because the vast majority of employees not covered by a private retirement program work for _______, who are apt to be reluctant to adopt a defined benefit plan and take on the potential liabilities that are imposed by ERISA, many such employers will find the defined contribution alternative, which has no such liabilities, to be a more palatable approach
- unfunded liabilities
- net worth
- smaller companies
A qualified plan must meet specific nondiscriminatory requirements as to employees covered under the plan. this requirement is set forth in section _______, and the tests required by this section often are called the “______” or coverage tests.
- 410(b) of the IRC
- 410(b)
The Section 415 limit for the maximum annual benefit that can be paid to a participant under a defined benefit plan is the lesser of (2):
- 100% of the participant’s high three-year average compensation
- $205,000 (as of 2013 and subsequently adjusted for inflation).
an employee is deemed a highly compensated employee if he or she: (3)
- Was a 5% owner of the employer during the current or preceding year
- Had compensation in the preceding year of $115,000
- was in the top 20% of employees in terms of compensation for that year.
Minimum distribution rules are found in Section 401(a)(9) of the IRC. There are two distinct elements to these rules. Distributions must _____ and ______
- commence within stated periods of time.
- be made in minimum amounts
A major aspect of Title I of _____ concerns the disclosure of information to participants and their beneficiaries and to the government. these requirements generally apply to most tax-qualified plans, regardless of the number of participants involved
ERSIA
The (3) principal tax advantages of a qualified retirement plan are:
- (a) Contributions made by the employer are deductible as a business expense.
- (b) Investment income on these contributions normally is not subject to federal income tax until paid out in the form of benefits.
- (c) An employee is not considered to be in receipt of taxable income until benefits are distributed
The Tax Reform Act of 1986 added Section _____ to the IRC, limiting the amount of an employee’s compensation that can be taken into account in determining contributions or benefits under a qualified plan.
Limits currently is: ______
- 401(a)(17)
- $255,000
The primary advantages of a defined benefit plan are:
- Can be structured to achieve specific ______.
- can be integrated on the basis of _______
- an employer interested primarily in providing retirement benefits can use available funds more efficiently for this purpose under a defined benefit plan.
- may result in _______ of employer contributions since the employee’s age, past service and pay all may be taken into account implicitly.
- The risk of _______ may be transferred from the employee to the employer
- _________ will be borne by the employer, not the employee, in a defined benefit plan.
- Benefits for employees who terminate employment at younger ages can be more costly under _________
- income replacement objectives
- Social Security benefits
- an equitable allocation
- inflation
- investment risk
- defined contribution
to achieve a tax-qualified status, a plan must observe two statutory limits on contributions and/or benefits.
- The first is a limit on the amount of an employee’s ______ that may be taken into account when determining the contributions or benefits made on his or her behalf.
- The second is a limit on the annual _____ that may be made to an employee’s account in the case of a defined _______ plan, or on the benefits payable to an employee in the case of a defined _____ plan.
- compensation
- additions
- contribution
- benefit
Vesting requirements for a defined benefit plan: (2)
(Since passage of the Tax Reform Act of 1986, after December 31, 1986:)
- 100% vesting after ____ years of service or
- Graded vesting with 20% vesting after ___ years of service, increasing by 20% multiples for each year until 100% vesting is achieved after ___ years.
- five
- three
- seven
