Assignment 8 - Cash Balance & other Hybrid Retirement Approaches Flashcards
- DC hybrid plan
- profit sharing plan that allocates contribs. based on FV of contrib. at partic’s NRA
- greater benef for older partic.
- more geared towards smaller ER’s with older exec. staff and younger rank-and-file EE’s
- disadv - 2 partic, same YoS and pay, could receive diff. annual allocs. to accts because of the age difference.
age weighted profit sharing
(DC Hybrid Plans)
- term for a plan that is actually 2 separate plans, DB and DC, working to complement one another
- DC plan providing the up-side potential (based on comp. contrib.)
- w/ DB plan providing the guaranteed minimum benef. (based on years of service and pay)
floor offset plan
**A DC plan which annual contrib is based on actuarial determination of the target replacement benef. at retirement
- partic. acct is credited w/ the actual inv. earnings of the plan
- plan sponsor doesn’t looks to see if the earnings are near what was assumed until retirement and the benef. are disbursed.
- more in favor of older partic.
target benefit plan
(DC hybrid plan)
term used to describe a condition occurring when a traditional DB plan is convereted to a cash balance plan
mostly happens to partic. w/ longer service records b/c of difference in benef. accrual patterns b/w the two types of plans
may experience a sudden decrease in accrual rates and expected benef. under a cash balance plan w/ less of the overall benef. accrual taking place in later years
pension wear away
a qualified retirement plan that has characteristics typical of both DB and DC plans
allows plan sponsors to meet plan obj’s that are difficult to achieve w/ just the traditional plans (alone)
hybrid retirement plans
PPA and Cash Balance Hybrid plans
not age discriminatory as long as pay and annual interest credits for older workers are not less than those for younger workers
How is a hybrid plan determined to be a DB or a DC plan?
Whether there are individual accounts for plan assets
DC = assets held in indiv. accts
DB = assets held in one acct
- held in one acct w/ no partic. allocation (DB)
- min. funding to provide promised benef. (DB)
- better for mobile and younger EEs (DC)
- acct balance growth reported periodically to partic. showing additions and earnings (DC)
- benef. is based on career average (DC)
- received benef. = annuity or lump sum
- fixed I/R credit
- early accrual
- annual contrib. credit
Cash Balance
(Defined Benefit Hybrid Plan)
(2) lawsuits concerning conversion to a Cash-Balance Hybrid Plan
- older, L/T EEs were frozen at their benef. level until the calc. of the cash bal. got them up to where the DB plan accrued benef. was (wear-away) = No longer allowed by PPA
- CB plans discrim. against older EEs since they will receive the same contrib. as a young ee, but it will get less earnings credit (due to being closer to retirement) and therefore the resulting benef. for the same work is less (still in the courts)
- gives %age credits for each year, then at the end of the year the sum of the credits
- @ retirement - credits are applied to the final average pay
- lump sum is the normal benef. pmt
- similar to cash balance plan
- give greater credit for longer service &/or older EEs
Pension Equity Plans
(Defined Benefit Hybrid Plan)
DB Hybrid Plans
- promise a specific benef. level and direct inv. of plan assets through commingled funds, bear inv. risk, and reap inv. reward.
- ER = assumes risk adn reaps benef. awards
- subj. to ERISA for DB plans.
- benefit accrual = partic. see the growth of benef.
- benefit portability = DC part; see growth throughout and get the benef. at the end; more protable due to lump sum pmt option
- integrate easily with SS and target income replacement formulas
- DC plan can pass the discrim. test based on either contrib. (DC) or benef. at retirement (DB)
- need to have a single formula for all partic. contrib., but there can be different ones as long as the plan passes the discrim. tests based on allocation groups
maximize benef. to a small group of EE and minimize the benef. to all other EEs
uses Cross Testing to pass this test.
New Comparability plans
(DC Hybrid Plans)
a hyrbrid plan that is a DB plan
sponsor makes contribs. based on specified formula that provides an annual contrib. credit and applies a fixed interest rate, making the eventual benef. definitely determinable
cash balance plans
a hyrbrid plan that is a DB plan
benef. based on final avg pay and %age credits rec’d each yr.
at the end of employment, sum of %age creds is applied to final avg pay to determine the lump-sum benef
must have option to take as annuity too
more in favor for older EE’s and with longer service
pension equity plans
DC hybrid plan
contrib. is based on allocation groups estab. by plan sponsor
result - high %age of contrib. is focused on key EEs
new comparability plans
