Exam 3 Flashcards
What is a defined benefit plan?
they are pension plans for employees and/or their beneficiaries
how can defined benefit plans be paid?
percent of salary
or
specific dollar amount
Name the four types of Defined Benefit Plans
Flat benefit plan (Everyone gets the same amount or %)
Unit Benefit Plan ($ amount or % of salary) x years of service
Variable Benefit Plan (Employee’s units / total units in plan)
Floor-offset Plan (coordinates with defined contribution plans)
Most people do not have Defined Benefit Plans they have (what the trend is in availability)
Defined Contribution Plans
not commonly offered
What are the minimum requirements to be a QUALIFIED Defined Benefits Plan?
non-discriminating testing
Minimum Age Participant (21) [younger is usually ok]
General Vesting Requirements (they earn part of the pension)
Minimum Service Participant (1 year waiting period)
What is cliff vesting and Grade vesting?
Cliff Vesting is full at 5 years
Grade Vesting : it is phased in 3-7 years
What is the maximum benefit employees receive in Defined Benefit Plans
must be lower than 100% of highest 3 salary years
$210,000 in 2015 and 2016 but rises to $215,000 in 2017
Why is there no mandatory retirement age?
Age discrimination Law
Early Retirement Age
Normal Retirment Age
Deffered Retirement Age
50-59
60-65
66-70
What are the Employee Advantages for Defined Benefit Plans?
predictable (specific) benefit
no responsibility for investment results (guaranteed)
Flat benefit plans benefit people who join later
QUALIFIED plans have tax defferal
What are the employee disadvantages for Defined Benefit Plans?
Cannot get bigger pension because good investment results
10% early withdrawal penalty before 59 1/2
minimum distribution requirements after 70 1/2
What are the employer advantages for Defined Benefit Plans?
recruitment and retention of employees
flat benefit favors older owners
good investment gains favor owner
Forfeiture (employees leaving) favors employers
Contributions are tax deductible
What are the disadvantages for employers who have Defined Benefit Plans?
future contributions are unpredictable
expensive to maintain
difficult to terminate
Contributions always required (even if going bankrupt)
THEY ARE COMPLICATED
What is the Employee Retirement Income Security Act (ERISA)
establishes the requirements for:
educating and informing employees
participating, vesting, benefit accrual, funding
Establishes Pension Benefit Guarantee Corp.
Under ERISA fiduciaries are made accountable?(meaning employees can sue?)
TRUE
What does the PBGC stand for and what is their function?
Pension Benefit Guarantee Corporation
A federal corporation that guarantees pension plans
How is the PBGC funded?
insurance premiums on pension plans
How are the premiums and benefits determined?
CONGRESS (FUNDING PROBLEMS)
The PBGC insures how many people?
41 million people
813,000 are being paid from failed plans
When is the projected insolvency of PBGC?
between 2022 and 2032 (remember graph)
What are defined contribution plans?
examples are 401k plans and these are individual accounts (not like defined benefit plans)
what are the minimum requirements for a QUALIFIED defined contribution plan? (similar similar to defined benefit plan)
non-discriminating testing
minimum age to participate (21)
general vesting (cliff or graded)
How are defined Contribution plans funded?
Employee
Employer
or both
What is the maximum contribution in 401k, 403(b) and 457 plans?
$53,000 in 2015 (both employer and employee)
($18,000 in each) if older than 50 an extra $6000 is allowed
How are defined contribution benefits determined?
dependent on market returns
Employee choses how they are distributed
What is the maximum contribution amount in IRA? (per year)
$5,500 in 2016 and 2017
extra $1000 if older than 50
What maximum contribution for SIMPLE plans?
$53,000 in 2016 54 in 2017
employee maximum is $12,500 in 2016 and 2017
What is the maximum employee contribution for SIMPLE plan?
$12,500 in 2016 and 2017
What are some distribution options for defined benefit plans? (6 of them)
In partial distributions
lump-sum
as needed (ex take what is needed at retirement)
rollovers
distributions/transfers at death
annuity option (ex. preretirement survivor annuity) 50% to spouse
employee contributions in defined contribution plans before 1987 (tax impact)
Have already been taxed (distributed tax free)
general tax impact of distributions
as life insurance and at death
taxable when distributed (at ordinary tax rates)
possible early distribution penalty
as life insurance are tax free
at death are subject to estate tax
what is the maximum amount and time for loan permitted by a defined contribution plan?
Half of the account value but max is $50,000
5 years
How can loans on defined contribution plans be trouble?
must be repaid on time or it becomes an early distribution and is subject to taxes and penalties
What are Qualified Domestic Relations Order?
court order for
child support
alimony
property settlement in divorce EX pension plans and 401k plans
What are the general early distribution penalties and when are they subject to early distribution penalties?
generally 10% (plus 2.5% in CA)
distributions before 59.5 years old
Early distribution penalty does not apply to
distributions for
disability
payments under QDRO
Early Distribution Penalty for SEPs in last 2 years of participation?
25%
what are the minimum distribution requirements for defined contribution plans?
must begin by age 70 1/2 (but not if still working)
Minimum distribution is based off IRS tables
(50% penalty if the amount is not distributed)
Rollovers are only permitted to qualified plans
TRUE
What is the most common rollover?
qualified employer plan to an IRA
difference between direct rollover and indirect rollover
the 20% backup withholding
how are rollovers useful?
continues tax deferral
increase investment flexibility
it can reduce fees
What is CalPERS?
California Public Employee’s Retirement System
What is the funding status of CalPERS
As of 6/30/14 it is 76.3%
What is CalSTRS?
California State Teachers Retirement System
What is the funding status of CalSTRS?
69%
what are the disadvantages of a loan from a defined contribution plan?
you lose out on investment gains
payments must be repaid on time or considered as early distribution (subject to taxes and penalties)
what is the time limit of a rollover?
60 days
For defined contribution plans, how do you avoid the backup withholding requirement for rollovers?
have thee extra money or have the check say FBO (for the benefit of)
$20,000
Who are 401(k) plans designed for?
For- profits businesses
Non-profit organizations
SIMPLE 401(k) are for business with less than 100 employees
when are 401(k) plans a good choice?
when employer wants to provide a qualified plan
when employees have flexibility to invest (higher risk tolerance)
when employer is private or public tax payer
when employer wants companion to a defined benefit plan
WHo contributes to a 401(k) plan
Employee contributions (salary reduction) employer can match (optional)
What form does the employee sing to enroll in a 401(k)?
Salary reduction election form
What types of investment options can be provided in 401(k) plans?
Mutual funds (includes target funds)
Company Stock
To what extent are employee contributions subject to FIT,SIT,OASDI,Medicare,SDI taxes? (401(k))
not subject to FIT,SIT but
subject to OASDI,Medicare,SDI
To what extent are employer contributions subject to FIT,SIT,OASDI,Medicare,SDI taxes? (401(k))
not subject to OASDI or Medicare but
subject to UI and ETT
they are deductible if less than 25% of total payroll
To what extent are distributions subject to FIT,SIT,OASDI,Medicare, and SDI taxes? (401(k))
FIT and SIT are taxed when received
possible early distribution penalty
Advantages for employee (401(k) plans)
tax deferment retirement savings
Roth 401(k) pay tax today and distributions are tax free
employee chooses how much to save
funded by employee and employer sometimes
in hardship withdrawals are allowed
Advantages for employer (401(k))
employer has no investment risk
Disadvantages for employees in 401(k) plans?
account balances at retirement may be low (especially if you start late)
contributions are limited at $18,000
employees have all investment risk
What are the disadvantages for employers in 401(k) plans?
Non-discrimination testing is required
For whom are 403(b) plans designed for?
Tax-exempt organizations and public school systems
What investment options do 403(b) plans provide?
mutual funds with hold harmless agreement
tax deferred annuities (no losses but low gains)
Does ERISA apply too 403(b) plan?
Can be exempt from ERISA, if there are only employee contributions
For whom are 457 plans designed for?
aka deferred compensation plans
State and local governments and non-church tax-exempts
What is the maximum employee contributions if an employee has multiple plans (401k,403b,457)?
$36,000 and $48,000 if older than 50
What is the in-service roll over option? for 457 plans
$5000 and can be done one time but there are other requirments
Does ERISA apply to 457 plans?
no because government plans are not subject to ERISA
What is the California Secure choice Retirement Savings Program?
mandatory retirement savings plans for employees
effective January 1, 2017
Which employers does it apply to?
California Secure Choice
employers with 5 or more employees and do not offer a retirement plan
How and when are employees enrolled in California Secure Choice?
automatically enrolled
starting Jan 1 2017
What are the contribution amounts and limits in California Secure Choice?
automatic 3% deduction and increase each year by 1%
amount cannot exceed 8%
Who manages the investments in California Secure Choice ?
it can be
PERS/STRS
Private money managers
MyRAS
What type of investments will be acquired in the California Secure Choice.
For the first three years it only be in treasuries
then employee can choose investments (different funds)
How are administrative costs paid for California Secure Choice?
covered by participant contributions or investment returns
fees cannot exceed 1% after 6 years
Who is responsible for investment gains and losses in California Secure Choice?
Employee is solely responsible for all investment gains or losses
WHat are the legs of the retirement stool?
Free time
Money
Health
Which types of defined benefit plans can allow amounts to be transferred or rolled over to a defined contribution plan?
floor off set
