Chapter 4 Flashcards
What are the two types of defined benefit pension plans?
Defined Benefit Pension Plans and Cash Balance Pension Plans.
What are the two types of defined contribution plans?
Money Purchase Pension Plans and Target Benefit Pension Plans.
T/F IN a defined benefit pension plan, the plan sponsor must fund the plan on an annual basis with an amount within the actuaries calculated funding range.
True
T/F Minimum require contribution towards a defined benefit pension plan will depend on a comparison of the FV of the plan’s assets with the plan’s funding target and normal costs.
False, the plan’s minimum requirements will depend on a comparison of the PV of the plan’s assets with the plan’s funding target and normal cost.
How is the funding target defined in a defined benefit plan?
100 percent of the PV of all benefits accrued.
How is the target normal cost defined in a defined benefit plan?
Equals the value of the plan benefits earned by employees during the year, including any benefit increases attributable to compensation increase during the year.
T/F If the value of a plan’s assets is less than the plan’s funding target, the minimum required contribution will be the sum of the plan’s normal costs and any shortfall amortization charges.
True
T/F If the value of the plan’s assets is equal to the plan’s funding target, the minimum required contribution for the plan year is the target normal cost plus the extent to which the value of the plan’s assets exceed the funding target?
False, less the extent to which the value of the plan’s assets exceed the funding target.
T/F If the ratio of plan assets to benefit obligations is less than 100 percent, a funding shortfall exists. This amount must be amortized in level annual installments over seven years.
True.
T/F In a defined contribution plan, the plan sponsor must fund the plan annual with the amount defined in the plan document.
True.
What is an in service withdrawal?
Any withdrawal form a pension plan while the employee is a participant other than a loan.
T/F A participation in a pension plan can take an in service withdrawal from the pension plan.
False, typically in service withdrawals cannot take an in service withdrawal except in the case where the individual is 62 years old and has a defined benefit pension plan.
T/F There is a limit of 10 percent investment of pension plans assets in employer securities.
True.
T/F Defined contribution plans holding publicly traded employer securities are not required to allow plan participants to diversify their contributions.
False, the are required to allow plan participants to diversify their contributions.
T/F Pension plans have limited investment in life insurance.
True, limited to providing incidental death benefits. Must pass either the 25 percent test of 100 to 1 ratio test.
T/F Life insurance can be the primary focus of a qualified plan
False, cannot be the focus of the qualified plan.
What is the 25 percent in a term or universal life insurance policy?
The aggregate life insurance policy premiums cannot exceed 25 percent of the employer’s aggregate contributions.
What is the 25 percent test for whole life insurance?
The aggregate life insurance premiums cannot exceed 50 percent of the employer’s aggregate contributions.
What does the 100 to 1 ratio test limit?
Limits the death benefit amount of life insurance coverage purchased within a qualified plan to 100 times the monthly accrued retirement benefit provided under the qualified plan.
What is a 412(e)(3) Plan
A specific type of defined benefit pension plan that is funded entirely by a life insurance contract or annuity. The employer claims a tax deduction for contributions made to pay premiums.
T/F The only plans that require an actuary annually are defined benefit pension plans
True
T/F Target benefit pension plans require an actuary at inception
True.
T/F In a defined contribution plan, the investment risk is with the employer, while in a defined benefit plan the investment risk is with the employee?
False, DC- employee, DB- employer
How are forfeitures handled in defined benefit plans?
Forfeitures reduce future plan funding costs to the employer.
How are forfeitures handled in defined contribution plans?
The employer chooses to either reduce future plan funding cost for the employer, or allocate to other plan participants.
What is PBGC?
Pension Benefits Guaranty Corporation. A federal corporation that actus as an insurance provider to maintain the benefits promised to lower paid employees by their defined benefit pension plans.
T/F Plan Sponsors pay the premiums for PBGC
True
T/F If the pension fund is inadequate or the company goes bankrupt, the PBGC will pay pension benefits, subject to a limit.
True
What is the maximum annual PBGC benefits in 2016?
60,136 dollars.
What is a participant’s accrued benefit in a defined benefit plan?
= Present value of the vested expected future payments at retirement.
What is the participant’s accrued benefit in a defined contribution plan?
= Vested account balance in the qualified plan.
How can credit for prior service be handled by defined benefit plans?
May give credit for prior service. If a DB gives credit for service prior to plan implementation it will create a large initial funding which may be spread out over a few years.
How is credit for prior service handled in defined contribution plans?
No credit for prior service is permitted.
What is the excess method?
A method which provides an excess benefit to those participants whose earnings are in excess of SS wage base.
T/F The excess method is used by both DB and DC plans?
True
What is the offset method?
The offset method reduces the benefit to those employees whose earnings are below the SS wage base. The offset method is only used by DB plans.
T/F DB plans cannot use commingled accoutns
False, DB can use commingled accoutns.
T/F DC plans generally use separate individual accounts
True.
What is a defined benefit pension plan?
What most people think about when they think about historical pension plans. DB plans have mandatory funding requirements. Accounts are commingled and favors older plan entrants. Eligibility/coverage/vesting- same as qualified plans.
How can defined benefit pension plan payouts be calculated?
Flat amount formula= dollar benefit. Flat percentage formula-percentage of salary. Unit credit forula= yeals of service times salary.
What is a cash benefit pension plans?
Type of benefit pension plan- hybrid. Mandatory funding requirements. Pension benefit based on annual guaranteed contribution rate and guaranteed earnings on the contributions. Commingled.
What are the benefits of cash balance pension plans?
Takes some risk away from the employer and guarantees a certain return on contributions. The benefit the employee receives may be less. Employees receive participation statements with hypothetical separate accounts. Favors younger plan entrants.
What is a money purchase pension plan?
Define contribution plan and has mandatory annual funding at a fixed percentage of the employee’s compensation- up to 25 percent. The participant assumes investment risk. Favors younger plan entrants. Cousin to profit sharing plan but there is mandatory funding.
Why would people not make a mandatory purchase plan in today’s environment?
Because you can contribute 25 percent of comp in profit sharing plans with no mandatory funding.
What is a target benefit pension fund?
Allows to skew benefit based on age. The plan determines the contribution based on the participant’s age. Favors old entrants.
