Module 2: Defined Benefits and Other Pension Plans

Question 1

What is the calculation for the minimum funding standards variables used?

Answer 1

Participant Age, Length of Service, Compensation, expected investment results and Admin expenses

Question 2

How much will DB Plan benefits be reduced if the employee leaves early?

Answer 2

10% for every year of service below 10 years.

Question 3

Who does ERISA require defined benefit plan information to be reported and disclosed to?

Answer 3

• Plan participants
• IRS
• DOL
• PBGC

Question 4

What are the businesses that defined benefit pension plans are most suitable for?

Answer 4

1. One with a predominately older workforce, typically with owner and highly valued exects age 50+.
2. A company with a stable cash flow, because it’s mandatory that you make annual minimum contributions

Question 5

Who guarantees the DB benefits?

Answer 5

• employer and to a limited extent the PBGC

Question 6

What are the parts to the premium for the PBGC Insurance?

Answer 6

-A base and variable premiumd

**A special reduced premium is effective for employers with 25 or fewer employees (under the Pension Protection Act of 2006)

Question 7

Three Formulas used for the defined benefit:

Answer 7

1. Flat Amount Formula
2. Flat Percentage Formula
3. Unit Benefit Formula

Question 8

Flat Amount Formula

Answer 8

A specified dollar amount is promised to the employee per month for life. It does not differentiate among employees with different compensation and does not use an accrued benefit actuarial cost method.

Question 9

Flat Percentage Formula

Answer 9

This provides a retirement benefit that is a percentage of the employees average earnings and will usually require certain amount of inium years of service before the full percentage benefit is payable

Question 10

Unit benefit formula

Answer 10

A percentage of earnings is paid for each year of service, usually 1-2%. A successor entity may recognize up to five years of service when establishing a defined benefit plan.

Question 11

Two ways to calculate average earnings under the benefit formulas:

Answer 11

1. Career Average Method

2. Final Average Method

Question 12

Which method tends to be better for the employee to calculate average earnings?

Answer 12

The final average method will generate a larger benefit for the employee.

Question 13

What must defined benefit forfeitures be used for?

Answer 13

They must be used to reduce the amount of contributions they need to make for the next year

Question 14

Deductions for DB plans

Answer 14

Contributions are fully deductible, but there is not limit on the amount that can be deducted because there has to me a minimum contribution amount

Question 15

What is a DB(k) Plan?

Answer 15

A DB(k) plan allows a traditional defined benefit pension plan to accept Section 401(k) type employee contributions.

Question 16

Rules for a DB(k) plan

Answer 16

No more than 500 employees
- a section 401k plan must be include an auto enrollment feature and a fully vested on 50% match on the first 4% of compensation deferred by an employee.

Question 17

DB(k) Advantages for Employee

Answer 17

• Guaranteed monthly income at retirement from the defined benefit portion of the plan
• Encouraged employers without pension plans to establish a plan
• Combines the security employees get through traditional defined benefit pension plans with individual investment control of the 401(k) portion
• Allows automatic enrollment provisions, which encourage employees to save more than they may have in a T 401(k).

Question 18

DB(k) Advantages for Employer

Answer 18

• exemption from top-heavy rules
• allows small employers to sponsor a defined benefit pension plan with more predictable costs because of the section 401(k) matching contribution is not contingent upon factors such as employee mortality, plan investment returns, and other factors
• specifications and the defined benefit formula are define in advance
• Offers simplified administration and potentially lower costs than having two individual plans
• Requires only one plan document, one trust, one form 5500, one SPD, and one set of statements

Question 19

Cash Balance Pension Plan

Answer 19

A type of defined benefit pension plan that includes features of a defined contribution plan.

Question 20

Features of a Cash Balance Pension Plan

Answer 20

• Still have pooled investments
• Guaranteed Interest Rate Credit to the account
• ## Investment decisions made by a fiduciary

Question 21

Advantages of a Cash Balance Pension Plan

Answer 21

• A certain level of plan benefits are guaranteed by the PBGC
• There are significant cost savings as compared to the traditional defined benefit pension plan.

Question 22

Disadvantages of a Cash Balance Pension Plan

Answer 22

• employer bears poor investment performance risk
• Early withdrawals are subject to penalty
• Subject to the minimum funding standards rules
• the benefits may be inadequate for older plan entrants
• Actuaries are still required for cash balance plans

Question 23

Fully Insured Pension Plan

Answer 23

A type of traditional defined benefit plan funded exclusively by cash value life insurance or annuity contracts.

Question 24

Features of a fully insured pension plan

Answer 24

• No plan trust exists
• exempt from minimum funding standards, unless there is an outstanding loan against the policy
• no retirement plan loans available to participants
• simplified reporting requirements, and do not need an actuary
• allow far greater deductible contributions to be made to the plan.

Question 25

Money Purchase Pension Plan (DC)

Answer 25

DC pension plan in which an employer makes annual lmandatory contributions to each employee’s individual account adnt eh employee bears the investment risk.

Question 26

Features of a Money Purchase Pension Plan

Answer 26

• no promise of final benefit, but a promise to contribute each year.
• Plan investment earnings and losses to not change contribution amounts
• just the employer makes the contribution, the employee does not

Question 27

Money Purchase Pension Plan Advantages

Answer 27

• relatively straightforward and simple to explain to potential participants, with a predictable cost
• The account balance generated under the plan may be distributed as a lump sum, an annuity or rolled over to an IRA
• Equal contributions for younger and older employees with the same salary.

Question 28

Target Benefit Pension Plan

Answer 28

a qualified defined contribution pension plan in which employer contributions are made for each participant in an actuarially determined amount to reach a targeted benefit at the specified normal retirement age for the plan.

Question 29

Target Benefit Features

Answer 29

• It seems that the actuarial assumptions only take place in that first year, and then after that there is no periodic actuarial valuations and the plan is funded like a money purchase pension plan.
• each employee has a separate (individual) account
• PBGC insurance is not available.
• deductibility of 25%
• Defined Contribution Plan Contribution Limits apply

Question 30

Tandem Plans

Answer 30

obtain greater tax deduction at the cost of two plan administration expenses as well as a partial mandatory employer contribution.

Question 31

How to target benefit pension plans get around discrimination?

Answer 31

They use a permitted concept known as cross-testing to meet qualified plan nondiscrimination.

Question 32

In a defined benefit plan, what can a forfeiture be used for?

Answer 32

It can only be used toward plan expenses or future employer contributions