Chapter 2: Flashcards

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1
Q

Who is a traditional DB Pension Plan suited for? 2.1

A

Older people bc it allows bigger contributions the older you are.

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2
Q

What are the advantages and disadvantages of a traditional DB Pension Plan? 2.1

A
  • PBGC Insured
  • You know exactly what you’ll benefit when you retire
  • Employees might retire earlier because they can afford to retire

Disadvantages:

  • Must use an actuary
  • Expensive
  • Complicated If the investments do poorly, the employer must still contribute
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3
Q

What does a pension plan mean? 2.1

A

Money must be added no matter what. The can be defined benefit or defined contribution. Four types include:

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4
Q

What plans does the PBGC cover? Who pays the premiums?

2.1

A

Defined benefit plans including cash value plans.

Max monthly PBGC payout is limited to less than $6000

Premiums are paid by the employer.

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5
Q

What is the max benefit in a defined benefit plan at the retirement age of 65?

A

The lesser of

  • $230k annually or
  • 100% of the highest average earnings over 3 years (topped at $290)
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6
Q

What is the flat amount formula for DB plans?

2.1

A
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7
Q

What is the flat percentage formula in DB plans?

2.1

A
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8
Q

How are all DB plans funded?

2.1

A
  • Mandatory annual funding
  • Earnings affect the required funding
  • DB plan forfeitures
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9
Q

What things will decrease the required contributions to the plan?

A

Higher than expected

  • investment returns
  • Turnover of employees
  • Mortality of employee
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10
Q

What is a DB(k) Plan?

2.2

A
  • Hybrid section 401(k) and DB plan
  • It must have automatic enrollment
  • Must have a fully vested 50% match on the first 4% contributed by the employee
  • Employee gets guaranteed income on retirement
  • Employers are exempt from top-heavy rules(but not non-discrimination)
    • More predictable costs
    • simpler to run
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11
Q

What is a cash balance pension plan?

2.2

A
  • A defined benefit plan with featured of a defined contribution plan.
  • All of the investments are together and managed by the employer
  • Max benefit is $230k or the highest avg 3 years

Advantages

  • Insured by PBGC
  • lower costs than traditional DB

Disadvantages

  • The employer bears the investment risk
  • the lump sum amount might be decreased if the plan is rolled over from a traditional
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12
Q

What are the attributes of 412(e)(3) plans?

A
  • Funded through cash value life insurance
  • Appropriate for companies with stable cash flows

Advantages

  • Can put a lot of money into these plans
  • Death Benefits
  • Exempt from min funding standards
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13
Q

What is a money purchase pension plan?

A
  • DC plan
  • Mandatory annual contributions
  • Max contributions are lesser of 100% of income or $58000
  • No actuary
  • No PBGC
  • The firm can deduct up to 25% of the contributions

Disadvantages:

  • Lacks contribution flexibility
  • Only 10% of contribution can go into emoployer stock
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14
Q

What is a target benefit plan?

A
  • A type of Defined CONTRIBUTION plan
  • Actuary only in the first year
  • Targets a retirement benefit, but they might not hit it
  • No guarantee
  • Favor older people
  • Worker chooses where the investments will be
  • $58000 max contribution rule
  • Annual contributions are certain
  • Benefits
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15
Q

What is the death benefit test for defined benefit pension plans?

2.1

A

DB plans use the 100 times test. The death benefit can’t exceed 100 times the participant’s projected monthly benefit.

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16
Q

How fast must DB plan vest?

A

Plan benefits attributable to employer contributions for a defined benefit plan must be vested (or nonforfeitable) at least as rapidly as 100% after five years of service. An alternative three- to seven-year graded vesting schedule may also be used.

17
Q

ERISA requres reporting and disclosure of db plans to:

A
  • PBGC
  • Plan participants
  • IRS
  • DOL
18
Q

What is the unit benefit formula for defined benefit plans?

2.1

A
19
Q

What is section 415(b)?

A

For DB: Limits the pension benefits that may be provided under the plan to the lesser of $230k or 100% of the participants avg 3 years highest comp

For DC: Or contributions can’t exceed 100% and 58kk