Assignment 4 - DC vs. DB Structures Flashcards
- plan sets the benef to achieve specific income replacement objs.
- ER makes the contib. necessary to fund the benef.
- ER bears the inv. risk
- can be integrated on the basis of SS benef.
- ER can bear inflation risk by relating final pay to the benef.
- benef. for EE’s who term. at younger ages can be more costly under DC
DB plan
- plan sets the alloc. method of the contrib.
- indiv. acct for each partic. are maintained
- partic. bear the inv. risk
- ER portion is fixed
- forced to adjust contrib. levels in order to integrate with SS
- benef. for EE’s who term. at younger ages can be more costly under DC
- offer ER’s max flexibility in terms of cost commitment
- increase EE prod. and EE identifi. with the comp and the goals that can be achieved.
- if younger EE group, the plan is apt to have greater EE relations value
- can make contribs. on a before-tax basis
- lower admin costs than DB plans due to no having to pay premiumes to PBGC
DC plan
plan that satisfies the requirements of ERISA and subsequent laws
- contribs. made by ER are ded. as bus. exp up to certain limits
- inv. income on contribs. are normally not subj. to fed’l income tax until paid out
- not taxable income to EE until benefs. are distrib.
qualified retirement plan
earnings above $110,000 (2010) and:
- top 20% of EE’s by pay
OR
- 5% owner
HCE = highly compensated EE
limits on compensation recognized in retirement plans
- $245,000 in 2010
401(a)17
*limits amt of benefs. paid to an indiv. EE under DB and the annual additions made by the EE under DC plan
DC plan – lesser of 25% of pay or $49,000 (2010)
DB plan – lesser of 100% of 3-yr avg pay or $195,000
Section 415 limits
key employees requirements
used in top-heavy plan status.
- officer owning $120,000 or more
- 5% owner
- 1% owner w/ comp. over $150,000
top heavy requirements
DC plan – 60% or more of plan assets held by “key EE’s”
DB plan – key EE’s have 60% or more of the projected benefs.
vesting requirements
*value of AT and elect.(BT) EE contribs. must be fully vested at all times.
*ER contribs. must be vested when EE reaches plan’s normal ret. age
*otherwise, ER contribs at min:
DC plan – 6-yr graded; 3-yr at 100%
DB plan – 7-yr graded; 5-yr at 100%
Sect. 410(a)(9)
min. distrib. requirements
- RP distrib. must start by age 70 1/2 unless still employed.
- 5% owner must start by age 70 1/2
- calc. is based on life expectancy of indiv. and beneficiary
entry requirements
min – age 21; 1000 hours of service
excludible EE’s
union; nonresident aliens; less than 21 years old; 6 mo. or less of service; work less than 17.5 hrs per week
- parent/subsidiary (A owns 80% of B)
- brother/sister (group of 5 or fewer owners, have 80% ownership and at least 50% common ownership)
- affiliated service agreement
Controlled Groups - types
- aggreg. of EE’s for qualif. testing purposes that would otherwise be considered separate
- all ERs to structure benef. programs to meet the competitive needs of separate bus. ops.
Qualified Separate Line of Business (QSLOB)
coverage tests to ensure that the plan is nondiscrim. as to coverage
Section 410(b) tests (also known as Coverage Tests)
– 70% of NHCEs
OR
– the percentage of the NHCEs cov’d by the plan is > / = 70% of the percentage of the HCEs cov’d
Ratio percentage tests
*Sect. 410(b) test
- benefs rec’d or contribs by the NCE (on avg) is 70% or greater than the benefs rec’d or contribs by the HCE
- -DC = contribs.
- -DB = benefs.
Avg Benef. test
*Sect. 410(b) test
SPD
Summary Plan Description
SMM
Summ of Material Modification
SAR
Summ Annual Report
(4) factors that determine EE’s ret. benef. for DC plans
- level of ER’s (and EE’s if applc.) contrib.
- age at entry
- ret. age
- inv. earnings/losses
- Since ERISA, DB plans expose ER to fin. liabil. if plan is term’d when there are unfunded liabil. for vested benefits.
- ER’s net worth is subj. to liens in favor of the PBGC
- smaller and newly formed ER’s usually develop DC plan instead
disadv. of DB plan
EE’s of all corps. who are members of a controlled group of corps. are to be treated as if they were EE’s of a single ER.
Controlled Groups - defin.
Due to ERISA, stmts that need to be automatically given to EE’s
- SPD
- SMM
- SAR
- stmt of benefs. for all EE’s who term. emplmnt
- written explanation to any EE or beneficiary whose claim for benefs. is denied.
Due to ERISA, items that must be made avail. to EE’s
- supporting plan docs
- complete app made to IRS for determination of plans’ tax-qualif’d status
- complete copy of plan’s annual fin. rpt
- personal benefits stmt
- plan term. rpt (if plan terms.)
When do benefs. begin for DC and DB plans?
- within 60 days of the latest of the following (3) events:
1. plan year in which partic. terms employment
2. completion of 10 years of participation
3. turns age 65 or the normal retirement age specified in the plan
Subject to Section 415 limits
- top-heavy min. contrib. amts
- EE salary deferral contribs.
- ER contribs.
- forfeiture allocations
how often does a benefit stmt have to be provided to partic?
once a qtr; PPA 2006
