Defined Benefit Plans Flashcards
What is a defined benefit plan?
Qualified pension plan that promises a specific benefit at retirement
Defined benefit plan
When is it appropriate?
Objective is to maximize plant contributions for the benefit of older employees or owners
Company is established and has a stable cash flow
Defined benefit plan
What are the advantages?
Tax deferred retirement savings
Retirement benefits can be provided, regardless of age
Benefit levels are guaranteed
For older, highly compensated, allows from maximum amount of tax to retirement savings
May encourage early retirement
Defined benefit plans
What are the disadvantages?
Higher installation and administrative cost
Complex to design
Employees who leave before retirement may receive relatively little benefit
Subject to annual mandatory funding, obligations, regardless of profit or loss
Employer assumes the risk of poor investments
Requires annual actuarial services
Additional nondiscrimination test 50/40
Defined benefit plans
Our subject to mandatory PBGC coverage. What are the maximum guaranteed benefits under PBGC? How are PBGC financed?
Age 65 for 2024 Max benefit is $7107 per month ($85,295 annually)
Financed by premiums paid by the sponsors of DB plans
Defined benefit plans
How may they be designed?
Flat amount formula
Flat percentage formula
Unit benefit formula (unit credit)
Defined benefit plan
What is the flat amount formula?
Does not differentiate among employees with different compensation
Some minimum service such as 15 to 20 years with the benefits, scaled back for fewer years of service
Defined benefit plan
What is the flat percentage formula?
Provide a retirement benefit that is a percentage of the employees average earnings
Plan will require certain minimum services, such as 25 years to obtain full percentage benefit with the percentage scale back for fewer years of service
Defined benefit plan
What is the unit benefit formula also known as unit credit?
Uses both returns and years of service to calculate retirement benefits
Example 1% per year per year of service
Define benefit plans
What happens in the event of a plan termination?
Requires that the plan have sufficient assets to cover benefits, accrued to the date of termination
Distress termination requires either that employer be liquidated or that the termination be necessary for the company survival
Employee benefits are 100% vested in full or partial termination
