Assignment 4 - Retirement Planning Approaches Flashcards
IF:
- DB plan has a PV of the cumulative accrued benefits for the key EEs exceeds 60% of the corresponding value for all EEs
- In a DC Plan, the aggregate accts for key EEs exceeds 60% of the aggergate accts of all EEs
Top Heavy
term for a plan in which SS benef. or contribs are taken into acct in establishing the plan
integrated plan
some commentators have referred to this as the “4th” leg of the retirement income stool
part time employment (during retirement years)
sources of retirement income
“3-legged stool”
- indiv. provided retirement income
- SS Benefits
- ER provided retirement income
- Analyses of Projected Returns
- presuppose that future returns will be similar to current returns, w/o any signif. variations
- expected returns should then be compared w/ projected outlays
Straight-line or Average Returns
- Analyses of Projected Returns
- uses a PC program to simulate thousands of mkt scenarios and various asset allocation strats. to develop probabilities of success for different inv. and w/drawal combos
Monte Carlo or Probabilistic Analysis
guaranteed income that the beneficiary cannot outlive
pmt consists of inv. income and return of capital invested
life annuity
investing capital in a fund that is more liquid and able to be used to respond to new inv. opportunities, emergencies or achieve other goals
preservation of capital
(3) types of insured status (SS benefs.)
- fully insured
- currently insured
- disability insured
- type of insured status for SS benefs.
- indiv. has 40 qtrs of coverage
fully insured
- type of insured status for SS benefs.
- indiv. has 6 qtrs of coverage during the 13 qtrs ending w/ his death, elig. for old-age benefs., or disability
currently insured
- type of insured status for SS benefs.
- worker is 31 or older when he becomes disabled
- must be fully insured
- must have at least 20 qtrs of coverage during the 40 qtr period prior to beginning disability
disability insured
Social Security Benefits
- start w/ elig. beginning at age 62 and being fully insured
- based on worker’s PIA
- early retirement is at age 62 w/ 75% of benefit paid
- full benef. at 66
- increased benef. until max age 70
SS death benefits
- fully insured wkr in the amt of 100% of PIA
- made payable to spouse that is 60+ or is disabled and age 50+
- 75% of PIA for surviving child under 18, under 19 and a student, or 18 or older if disabled prior to 22
- surviving spouse elig. for mother/father survivor’s benef. equal to 75% PIA as long as caring for dependent child under 16 or older and disabled
- dependent parent that is age 62+
SS disability income benefits
- cash disability income
- freezing of disable worker’s wage position
- 5-month elim. period
- fully insured wkr; w/ disability ruling
- any occupation rule and is expected to last for at least 12 months or death if it has already been 12 months
ADV’s of qualified plans
- ER contribs - deductible for income tax purposes by ER
- EE’s - no taxable income until benefits are distributed
- Inv. income gains - not taxed until paid out
- EE’s pre-taxed contribs through slry deferrals
- lump sum distrib. - favorable income tax treatment
- ER may pay full cost or part of cost of plan
- possible loan provisions from plan
preretirement protection for spouse’s benefit
a life annuity for the surviving spouse of a plan partic. who had a vested benef. in the plan and who dies before his/her benef. are to begin
qualifed preretirement survivor annuity (QPSA)
postretirement protection for spouse’s benefit
an annuity for the lifetime of the partic., w/ a survivorship annuity for the lifetime of his or her surviving spouse of not less than 50% or more than 100% of the annuity payable during their joint lives
Qualified Joint and Survivor Annuity (QJSA)
recognizes the rights of alternate parties to all or part of partic. of benefs. under a qualified retirement plan.
for example: under equitable distrib. of prop. laws, retirement plan rights often are considered marital prop. and thus are subj. to equitable division b/w the spouses upon separation or divorce
Qualifed Domestic Relations Order (QDRO)
Section 415 Contribution Limits
may not exceed the smaller of:
- DB: ER’s may not exceed $200,000 OR 100% of partic. avg ann. comp for highest 3 consec. yrs of comp.
- DC: may not exceed the lesser of $50,000 or 100% of partic’s annual comp.
Sect. 415 ER tax ded. limits on contrib.
- DB: annual ded. limit is the amt needed to fund the plan which may be deducted; may deduct UP to full funding limit (not more than full funding limit)
- DC: 25% of total comp. of partic. unless specified in the plan docs for other plans such as 401K, SIMPLEs, ESOPs, SEPs, target benef. plans, and IRAs
what is the compensation cap limit?
2012 - $250,000
the non-forfeitable right of the plan partic. to his/her acct balance in a DC or accrued benef. in DB plan.
right exists no matter if the partic. remains with ER
Vesting
Cliff Vesting
- DB: 100% after 5 YoS
- DC: 100% after 3 YoS
- this applies to qualified plans, IRAs and charities
- results from conduct of an unrelated trade or bus. regularly carried on by the exempt trust or org. and from income from debt-finance prop.
unrelated bus. taxable income (UBTI)
- type of hybrid plan
- DB, but structured to look like DC
- ER contrib. a % of EE’s comp.
- formula to determine funds needed during to pay out during retirement
- hypothetical accts are maintained for each partic. for contrib. and interest earned
- great in benefs to younger and shorter-servcie EEs
- lower costs to ER than typical DB plan
- benef. paid by lump sum or periodic pmts
cash balance plan
- type of hybrid plan
- DB plan
- benef. are expressed as a %age of final avg pay
- based on points received for each YoS
- points greater for older and longer service partic.
pension equity plans
- type of hybrid plan
- DC plan
- ER contribs are based on a target benefit formula
- directed to actual indiv. accts for partic. to be paid out at retirement
target benef. plan
- type of hybrid plan
- includes both a DC and a DB plan
- EE receives the larger benef. of the 2 at retirement
- benef. produced by the DB plan are reduced by a partic’s balance in the DC plan
- if the DC plan fails, the DB plan provides a minimum benef.
floor offset plan
- retirement plans for self-employed
- tax-favored benef.
- can be DB or DC plans
HR-10 or Keogh plans
a plan where there is a smaller benef. payable on earnings up to the SS integration level than on earnings above that level
excess plans
the total amt of benefs that my be paid to a worker and his elig. dependents
based on PIA
Family Maximum Benefit (FMB)
concept that ER’s sponsoring DB plans must make contribs. to plan in good times and in bad times.
funding rigidity
- an officer of the ER w/ annual comp. greater than 50% of the Sect. 415 $ limit for DB plans
- 5% owner of the ER
- more than 1% owner of the ER who has annual comp from the ER of more tha $160,000 (2009)
key employee
plan under which a pension benef. is calculated w/o regard to SS benef. and then a %age of SS benef. is deducted from the pension benef.
Offset Plan
contrib. on behalf of partic. and the inv. earnings that go into indiv. accts for each partic.
participant-directed accts
economic problems during retirement years
- assumption that financial needs during retirement yrs are lwer than those of actively working person prior to retirement is probably overstated
- retirees find themselves in the position of wanting to help their adult children or grandchildren financially
- effects of inflation and deflation (purchasing power)
- early retirement will increase the duration of time spent in retirement
- increasing life expectancy
- charitable-giving wants
SS eligibility requirements for old-age benefits
- must be aged 62 or older
- have attained “fully insured” status
- at full-benefit retirement age, the benef. is equal to worker’s PIA
- if elect this at 62, benefit will be permanently reduced
- this type of retirement plan has benefits expressed as a sepcified, definite benefit at retirement
- benefit may be $ amt or it may be determined by a formula
- since benefit is fixed, contrib. vary to fund the policy
defined benefit plan
- this type of retirement plan provides for an indiv. acct for each partic. w/ specified or variable contrib. being made to those accts
- accumulated acct balance for a particpant may be affected by factors such as contrib. to the acct, inv. income, inv. gains/losses from the assets in the acct, and possible forfeitures of other plan partic. that may be allocated to the acct
defined contribution plan
Retirement Equity Act
give a noncov’d spouse certain survivorship rights in the qualified retirement plan benefits of the cov’d spouse, unless those rights are waived by the cov’d spouse w/ the proper witnessed consent in wirting by the noncov’d spouse
postretirement protection for spouse’s benefits developed by the PPA
- an annuity for the life of the partic. w/ a survivor annuity for the life of the spouse that is equal to the applicable %age of the amt of the annuity that is payable during the joint lives of the partic and the spouse
AND
- the actuarial equivalent to a single annuity for the life of the partic.
qualified optional survivor annuity (QOSA)
tax law on loans
- loans may not exceed the smaller of:
- $50,000 OR
- 1/2 PV of EE’s vested benef. in the plan
- loans under $10,000 - not taxable
- must be repaid w/in 5 yrs; level pmts made at least qrtly (unless primary residence which then means w/in reasonable time)
- reasonable rate of int.
loans for qualified retirement plans
- many plans allow this
- advantage - loans are not considered to be taxable plan distrib. as long as they meet tax law requirements
minimum vesting schedules
Per older standards:
- 100% vesting after 5 yrs of service (cliff vesting) OR
- vesting at a rate of 20% after 3 yrs of service, 40% after 4, 60% after 5, 80% after 6, and 100% after 7 YoS (graded vesting)
after EGTRRA:
- 100% after 3-YoS (cliff vesting) OR
- Vesting at a rate of 20% after YoS, 40% after 3, 60% after 4, 80% after 5, and 100% after 6 YoS (graded vesting)
regulation that governs the operation of qualified retirement plans such as fid. liability issues, prohibited trans. rules, and rptg/disclosure requirements
ERISA
fiduciary standards set by ERISA
- act solely in the int. of the plan partic and benef.
- carry out their duties prudently
- follow the plan docs so long as they are consistent w/ ERISA
- diversify plan inv.
- pay only reasonable plan expenses
- this type of retirement plan is a DC plan established by ERs
- contribs are allocated under a defined predetermeined formula to indiv. accts
- indiv. accts are credited w/ inv. earnings
- can be integrated w/ SS
- may have loan provisions
- can be comined w/ other plans
- annual contribs. are usually discretionay w/ the ER; but must be allocated among partic. according to the formula
profit-sharing plans
types of profit-sharing plans
- regular
- age-weighted
- new comparability
- type of profit-sharing plans
- simply based on allocation formula on partic. compensation (uniform contrib. no matter what other factors may exist)
- typically favors younger EEs - compounding of inv. returns over a longer duration of time will enhance wealth accumulation
regular profit-sharing plan
- type of profit-sharing plans
- bases its allocation formula on both age and compensation
- typically favors older partic. w/ higher earnings
age-weighted profit-sharing plans
- type of profit sharing plans
- allocations can vary not only by each partic’s covered comp and age, but also by his or her job classification
new comparability profit-sharing plans
- contrib. to these accts are taxed currently as gross income to the EEs
- tax-free growth of inv. earnings inside acct
- tax-free distrib. of acct balances to partic. and beneficiaries
- no income or age limits on who can contrib.
ROTH accts (401K and 403b)
