CPSP: Plan Types & Considerations for Plan Design

Question 1

Defined Benefit Plan: What is ‘Final Pay Average’ based on?

Answer 1

Based on the last 3 - 5 years of participant’s earnings, prior to retirement

Question 2

Defined Benefit Plan: What is ‘Career Average Pay’ based on?

Answer 2

Based on the average total earnings of an participant’s employment.

Question 3

Defined Benefit Plan: Which funding and calculation type is the most common?

Answer 3

Career Average Pay

Question 4

Defined Benefit Plan: What is ‘Flat Dollar’ calculation based on?

Answer 4

As the title states, the amount paid is uniform among all participants using a flat-dollar pay amount

Question 5

Defined Benefit Plan: What participant factors may affect calculation formulas

Answer 5

A participant’s age at separation, time until retirement, and/or a participant’s seniority.

Question 6

Defined Benefit Plan: What is the ‘replacement ratio’?

Answer 6

How much of an employee’s income does the plan intend to provide, post retirement?

Question 7

Defined Benefit Plan: What is the most common replacement ratio used?

Answer 7

70% to 80% of income.

Question 8

Defined Benefit Plan: What does an Actuary do?

Answer 8

Manages DB plans, calculates funding needs. Actuarial charts are very complex, requiring specialists to manage/perform the necessary calculations to ensure adequate plan funding.

Question 9

Defined Benefit Plan: What is the maximum annual benefit payable under a DB plan?

Answer 9

$230,000 maximum annual payable benefit limit (as of 2021).

Question 10

Defined Benefit Plan: What is a ‘shortfall’?

Answer 10

When the plan assets are not sufficient to cover plan payout.

Question 11

Defined Benefit Plan: If there is a ‘shortfall’, what happens?

Answer 11

The plan sponsor must pay into the plan to make up for the shortfall.

Question 12

Defined Benefit Plan: What does PBGC stand for and what does it do?

Answer 12

Pension Benefit Guarantee Corporation. Government agency that protects the retirement securities. Requires plan sponsors to pay an ‘insurance premium’ per employee per month ($86 -$582 as of 2021).

Question 13

Defined Benefit Plan: What is ‘Actuarial Present Value’?

Answer 13

The amount of money that the plan sponsor projects needing in order to pay for the promised benefits. This figure is based on the payments received from the insured, the interest rate, and the probable time and frequency at which they will have to provide the promised benefits.

Question 14

Defined Contribution Plan: What is the current maximum pre-tax employee contribution limit?

Answer 14

$19,500 as of 2021 for participants under 50. $24,500 for participants 50+.

Question 15

Defined Benefit Plan: What are participant retirement payments called under DB plans?

Answer 15

Annuities

Question 16

Defined Contribution Plan: What is the youngest participant age that an employer may opt to allow participant entry (assuming all other qualifications met)?

Answer 16

14 years old.

Question 17

Defined Contribution Plan: At what age MUST an individual be allowed to participant under the IRC code (assuming all other qualifications met)?

Answer 17

21 years old.

Question 18

Defined Contribution Plan: What is the longest waiting period permissible under the IRC code (assuming all other qualifications met)?

Answer 18

1 year

Question 19

Cash Balance Funds: Who funds CB plans?

Answer 19

Employer only

Question 20

Defined Benefit Plan: What are the downsides of a DB plan?

Answer 20

Administration is complex. There are high investment risks. Participants have low visibility into the plan.
There is no funding flexibility. Employer requirements to make up any shortfall. NOT attractive to an industry with high workforce turnover.

Question 21

Defined Contribution Plan: What are the downsides of a DC plan?

Answer 21

There few tax benefits for the employer. Not useful in key employee retention.

Question 22

Defined Contribution Plan: What are the upsides of a DC plan?

Answer 22

Low administration complexity. Funding Flexibility. Attractive to workforces with high turn over. Workers have visibility into plan performance, calculation.

Question 23

Cash Balance/Hybrid Plans: In which industries are these plans more prevalent?

Answer 23

Highly paid, predictable industries such as doctors, lawyers, engineers, etc.

Question 24

Stock-Based Qualified Plans: What is a Stock Bonus Plan?

Answer 24

A DC plan designed to receive employer contributions into company stock.

Question 25

Stock-Based Qualified Plans: When a business sells its stock into a DC plan, does it receive a tax break on that sale?

Answer 25

No.

Question 26

Money Purchase Plan: Who funds MPP's?

Answer 26

Employers only. This plan type pairs with a DC plan. Less popular compared to more recent plan types.

Question 27

Non-Qualified Deferred Compensation Plans: What is its purpose, tax status under the IRC, and eligibility parameters?

Answer 27

Intended to attract and retain top 20% of workforce. Not qualified for tax exemption and therefore not subject to ERISA testing. Can be exclusionary in design given not a pre-tax plan.

Question 28

Health Savings Accounts: What is the 'triple tax advantage' of an HSA?

Answer 28

Employee and employer contributions are tax-free. Earnings on plan contributions are not taxed. Withdrawals to pay qualified medical expenses are not taxed.

Question 29

Health Savings Accounts: What are the max annual contributions?

Answer 29

$3,600 for individual coverage. $7,200 for family coverage. $1,000 additional catch-up contribution if over 55.

Question 30

Stock Bonus Plan: Explain the risks.

Answer 30

If the company performs poorly and a participant invests primarily in SBP, significant loss can occur.

Question 31

What is the difference between ESOP and Stock Bonus Plan?

Answer 31

ESOP limits stock ownership to employees. Stock Bonus Plan gives public stock to employees as part of retirement plan.

Question 32

ESPP: What is an Employer Stock Purchase Plan?

Answer 32

An ESPP is a company-run program where the participating employees can buy the company stock at a discounted price. Employees donate post-tax wages to the plan through their payroll deductions that build-up between the purchase date and the offering date. On the day of the purchase, the company utilizes the accumulated funds to buy the stock in the company for the participating employees. Can keep shares if departing the company.

Question 33

ESOP: What is an Employer Stock Ownership Plan?

Answer 33

ESOPs offer employees stock in the company without the need to purchase the shares. Can not keep shares when depart the company.

Question 34

NQDC Plans: Name five different types.

Answer 34

Salary Reduction Plans, 401(k) mirror plans, Supplemental Executive Retirement Plans (SERPs), Benefit Restoration Plans and Long-Term Incentive Plans.

Question 35

What is a Salary Reduction Plan?

Answer 35

Allows post-tax dollar contributions in excess of 401(k) limits.

Question 36

What is a Salary Reduction Plan?

Answer 36

Allows post-tax dollar contributions in excess of 401(k) limits. Plan mirrors existing 401(k)

Question 37

Supplemental Executive Retirement Plans: what are the basics?

Answer 37

Sets a promise-to-pay if executive works through a certain age, such as 62.

Question 38

Benefit Restoration Program: what are the basics?

Answer 38

Designed to 'restore' benefit had IRC pre-tax limits not interfered. For example: 10% of $600k is $60k, which exceeds annual contribution limits (IRC 402(g)). This plan would make up the difference. Also, contribution calc limit sets max annual earnings to $280k- that means the exec missed out on $320k's worth of income being factored in.

Question 39

Long-Term Incentive Plans: what are they?

Answer 39

A bonus with a vesting schedule. Amount may be tied to performance of company stock.

Question 40

What is a Rabbi Trust?

Answer 40

NQDC Plan that puts funds in a trust instead of held by the business, adding a sense of security.