Ch. 14 Defined Benefit Pension Plan Flashcards
Defined Benefit Pension Plan
a qualified, employer pension plan that guarantees a specified benefit level at and during retirement
Objective of plan
provide adequate level of retirement income to employees regardless of their age at plan entry
Used when an employer wants to allocate plan costs to the maximum extent to ____ employees
older
An older, controlling employee in a small business wants to maximize ….
tax-deferred retirement savings
5 advantages
- tax deferred retirement savings
- provide adequate retirement levels for employees regardless of their ages at plan entry
- benefit levels guaranteed by the employer and PBGC
- allows max amt of tax deferred retirement savings for older HCEs
- Investment risk with employer
5 disadvantages
- high installation and admin costs
- complex
- employees who leave before retirement may receive little benefits from plan
- employer has recurring annual funding obligations regardless of its business profit levels
- employer assumes investment risk
Flat amount formula
stated dollar amount for each plan participant
Flat percentage formula
retirement benefit is a percentage of the employee’s average earnings
Typically require minimum service to obtain full percentage
Unit credit formula
based on the employee’s service with the employer
Unit credit formula only takes into account the first ____ of employee’s comp
$245,000
Two common methods to compute average earnings
career average
final average
Career average
uses earning averaged over the employee’s entire career with employer
Final average
earnings are averaged over a number of years, usually 3-5 years immediately prior to retirement
Employer contributions are tax deductible when…
they are made
Contributions and earnings are tax-deferred for the employee until….
payments are made
