6 - Employee Bene ts and Perquisites— Part III Flashcards
FAS ____ requires that the cost of the pension reflected on the balance sheet include the projected benefit obligation factoring in a number of items. These items include _____ or settlement rate, rate of _____ increase, earnings on plan assets, prior service cost and unrecognized gains and losses.
Two of the measurements reflected on the balance sheet that show the funding status of defined benefit plans are the ______ benefit obligation and the ______ benefit obligation. Comparing these two amounts with the reported fund balance indicates the amount the fund is _____ or ______
87
discount
salary
accumulated
projected
over- or underfunded.
Pensions are considered _______ to the executive and are tax deductible to the employer. A statutory or qualified plan allows an exception to the normal rule of permitting a tax deduction only in the year in which the executive recognizes the income. The company is permitted to take a tax deduction for the year in which it makes a _______ to the plan, even though the executive does not receive the income until a later date.
income
contribution
The ___________ subjects all qualified pension and profit-sharing plans to requirements regarding employee eligibility and vesting, disclosure and reporting, fiduciary responsibilities, fiscal needs, funding, nondiscrimination structure and payment forms. The objective is to ensure that employee rights are protected and that pension benefits will be available to employees when they _____. Companies designing special early retirement plans to avoid having to terminate excess people need to be very careful because an analysis of group and classes may very well tilt to the higher paid, making the plan discriminatory.
Employee Retirement Income Security Act
retire
The federal ______________ prohibits companies from forcibly retiring employees at any age, but allows an exception for executives meeting certain criteria. An executive can be forced to retire if he or she is the head of a major local or regional operation, or the head of a major department or division, and has a combined company pension, excluding Social Security and payments from other employers, of at least $_______. Such employees, assuming they were bonafide executives at least ____ years immediately preceding retirement, may be retired by the company beginning at the age of 65 without concern for violating the terms of the act. Most companies want their executives to retire not later than the age of 65 and, therefore, offer nancial incentives through supplementary pension arrangements.
Age Discrimination in Employment Act (ADEA)
44,000
two
The three types of retirement plans are defined benefit, defined contribution and a hybrid or combination of the two.
A defined benefit plan specifies the amount of ______ that the employee will receive after meeting certain age and/or service requirements, and the contribution is determined ______ to meet this annuity amount.
A defined contribution plan specifies the amount of money to be set aside each _____. The value of such money at the time of retirement will be related to the _____ of investments made. In other words, in one case, the amount of the pension is known, but the ultimate cost is unknown until the assets are _____. In the other instance, the amount set aside each year is known, but the pension amount is not known until the employee _____. Defined benefit plans encourage individuals to stay with the company; defined contribution plans do not penalize the person for _____.
- annuity
- annually
- year
- market value
- valued
- retires
- leaving
Pension plans are paid for either by the company or by the employee or a combination whereby both contribute. Typically, defined benefit plans are paid totally by the _______, whereas defined contribution plans could be financed any one of three ways—company pays all, employee pays all, or both company and employee contribute.
company
In the design of pension plans, companies are allowed to take into consideration the fact that Social Security provides a much higher benefit value as a percentage of compensation to lower paid employees than to higher paid executives. Plans are allowed to “integrate” benefits with Social Security.
The _________ is the compensation level that separates the base from higher benefit levels or contributions. The _______ sets the maximum difference for defined benefits or accrual rates and defined contributions or contribution rates between lower and higher paid.
Thus, recognizing that Social Security benefits are of significantly greater value to lower paid than higher paid employees, companies are permitted to take this into consideration when designing their tax-qualified, de ned bene t and de ned contribution plans.
integration threshold
permitted disparity
How much pension is needed?
While it would be nice to receive a company retirement bene t equal to last year’s pay or at least equal to after-tax income, it is unlikely for pension planners to consider either seriously. Why not? There are several reasons. First, ______ during retirement are less than while working. Among those expenses that end are business-related expenses such as clothing, lunches and transportation. In addition, _______ deductions for pension plans and other benefit programs are eliminated. Admittedly, there may be post-active expenses that need to be included, but the net effect most likely still results in a figure less than ___% of final pay. Another reason for targeting less than final earnings is that Social Security bene ts will be paid to the retiree. However, because of the bene t level, Social Security will be a more signi cant factor for lower paid than executive-level employees.
expenses
payroll
100%
Payments from the pension plan are either in the form of an ______ or in a _______. Typically, de ned bene t plan bene ts are in the form of an annuity whereas de ned contribution plan bene ts are paid in a lump sum. However, the reverse is also possible.
As for lump sums, it is important to know that while all lump-sum distributions are lump- sum payouts, not all lump-sum payouts are lump-sum distributions. Since lump-sum distributions receive favorable tax treatment, namely they qualify for a tax-free rollover into an individual retirement account (IRA) or other defined contribution plan, it is important to know what constitutes a “lump-sum distribution.” It is defined as the payment within one taxable year of the full amount the employee is eligible to receive, paid under one of the following conditions:
- (1) the employee is at least ____,
- (2) the employee ______ or otherwise separates from employment or
- (3) the employee ____. Thus, an active employee may qualify only at the age of 591⁄2.
annuity
lump sum
- 591⁄2
- retires
- dies
describe eligibility for a retirement plan.
A retirement plan may require a minimum age (but not higher than 21) and/or years of service (not more than one or two) before becoming eligible. The reason for a minimum service requirement is to minimize administrative ______ for those leaving the company after only a year of employment. On the other side of the age issue, there are three retirement ages. These are normal, early and late. Retirement age is more signi cant with a _______ plan
While a company may identify a normal retirement age which is usually 65, it cannot legally force a person to retire at that age or any other age without going counter to ______ laws. However, there are bonafide executive exceptions. It is helpful to recognize that there are really three types of employees: those who really want to work past normal retirement, those who might work beyond that age and those who are going to retire at the age of 65 or sooner.
recordkeeping
defined benefit
age discrimination
Normal retirement age for most plans is ____. It is the age at which there is no reduction in the accrued defined benefit. Reductions called ______ are established for de ned bene t plans when the bene t will be received for a longer period and the plan has less time to fund the accrued bene t.
In addition to “age-only” normal requirements, there are “service-only” requirements. However, they are more typically in the public sector than in the private sector. Some “age-only” plans also establish an age and service combination rule that would qualify for a nondiscounted pension. Some companies establish an earlier normal retirement age for senior executives. This is the age at which they are expected to retire. If they were not eligible to receive a nondiscounted, de ned bene t pension from the quali ed plan, a nonquali ed plan would supplement bene ts.
Early retirement age is when an employee decides to retire before reaching normal retirement eligibility. For every year less than normal retirement, the pension bene t is reduced in three ways: there is (1) one less year of _____, (2) one less year of _____ and (3) a greater _____ of the annuity. Initially, these discounts were based on the actuarial factors of age and reduced time period for bene t accrual. However, over the years, many plans have substituted less harmful discounts, in effect subsidizing early retirements.
The definition of late retirement is a retirement at any point in time past normal retirement age. Since, with the exception of certain senior executives, it is no longer legally permissible to require a person to retire when reaching normal retirement age, plans will continue to _______ until the individual leaves as a late retiree. While the earnings and service credit will add to bene ts, there is typically no additional percentage for late retirement to complement the discount for an early retirement. Because of mortality factors, late retirement may cost defined benefit plans _______ than normal retirement.
65
discounts
service
earnings
discount
accrue benefits
less
When individuals have earned the right to receive bene ts because of their years of service, they are said to be ______. Even though an individual may not be eligible for retirement, the person may have earned a bene t. Tax-quali ed plans require that an employee’s right to receive bene ts occurs after a prescribed period of time. This requirement can be met in two ways. The rst way is that full bene ts are accrued after ____ years of service for de ned bene t plans (and after _____ years for de ned contribution plans), but nothing prior. This all or nothing type is called _____. The other way in which bene ts can be vested is by using a graduated schedule that begins vesting __% after the rst three years of service with an additional 20% every year thereafter, reaching 100% after ____ years for de ned bene t plans. (For de ned contribution plans under a graded vesting approach, 100% vesting can be achieved after ___ years.)
Vesting protects the employee should he or she desire to leave, move to another division or if terminated by the company. Bene t rights cannot be denied to the employee to the extent that they have been vested.
- vested
- five
- three
- cliff vesting
- 20%
- seven
- six
Retirement plans define earnings as salary paid during the period of employment. Many companies also include short-term incentive pay.
Companies sometimes increase the ______ of retirees if there has been a period of significant inflation since the date of their retirement. Typically, the adjustment is some fraction of the inflation increase similar to inflation-indexed Social Security benefits. Retirees may also receive a postretirement increase in their annuities from a career earnings plan if the plan were “_____,” raising the retirement amount. During times of high infiation, executives are likely to ____ plans for early retirement, thereby building up additional years of credit for pension payments. This is especially true when a company does not periodically improve the annuities of retired employees.
Since Social Security payments represent a greater portion of the pension of lower paid employees, such individuals are less affected by a company’s unwillingness to improve annuities of retirees than the executive whose major portion of pension is from company plans, not Social Security.
annuities
“updated”
defer
A defined benefit plan is one in which an employer pays at retirement a de nite bene t that is determinable and that is usually related to the years of service and pay for the employee. An example would be a plan that pays an employee at the age of 65 with 25 years of service a pension of 60% of his or her nal average salary.
De ned bene t plans fall into three categories.
A ______ plan is typically limited to hourly paid workers and negotiated by unions. Benefits accrue with length of service.
A ______ plan calculates bene ts based on total earnings during employment.
A ______ plan is more complex than the other two, often incorporating both earnings and years of service.
Candidate Note: In 2015 the Section 415(b) limit on the annual pension from a quali ed de ned bene t pension plan is the lesser of $______ or 100% of the participant’s average compensation for the highest paid three year
career service
career earnings
final pay
210,000
A final pay plan is more popular with employees than career service plans due to its emphasis on _______ earnings. Even updated career earnings plans have a drawback to employees inasmuch as there is no guarantee the company will continue such actions, and without them the pension will be signi cantly smaller. However, corporate financial people typically prefer an updated career earnings plan to a nal pay plan due to the current cost impact. Under the final pay plan, both prior and future years of service will be affected by future earnings.
Under the updated career earnings plan, only future service is affected by future earnings. Other things being equal, the executive receiving large pay increases is more interested in reducing the number of years used in calculating the average than a person receiving more modest pay increases.
In addition to the company pension, a retired employee is usually eligible for Social Security bene ts. A company plan of either career earnings or nal pay will produce the same percentage of pay increases and years of service for both clerk and executive; when added to Social Security bene ts, it produces a total retirement curve. Many companies integrate their pension plan bene ts with Social Security to try to smooth out the percentage curve. To maintain quali ed plan status, the plan must integrate in a manner acceptable to IRS. Essentially, this provides two approaches, excess and offset. Either may be used with a career earnings or nal pay plan.
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