Pension Plans + Profit Sharing Plans Flashcards
What is the maximum a defined benefit pension plan can pay in retirement?
How does it figure into pension benefit formulas?
The lesser of $230k or 100% of last 3 years of salary.
When using a defined benefit formula, such as 1% x years worked x salary, 230k is the highest salary you can use.
What in-service withdrawals are allowed for DB pension plans?
Workers can take withdrawals when 62 or older. This is a sort of phased-in retirement.
What is the limit for DB plans investing in employer securities?
DC plans can hold 100% employer securities, but what else must they plans do?
Pension plans cannot hold more than 10% of employer assets at time of purchase.
DC plans must also provide 3 non-company investment options for EEs.
A qualified plan that includes life insurance must pass either of what two tests?
The 25% test:
- If term or universal life is purchased, premium cannot exceed 25% of employer’s aggregate contribution to EE’s acct.
- If Whole life, 50%
The 100 to 1 test:
DB of insurance cannot exceed 100x of monthly retirement benefit.
What must happen to LI in a qualified plan at retirement?
It must be converted into cash or periodic income.
Which type of pension plan uses an actuary only at inception?
Which doesn’t use one at all?
Target benefit pension plans only use actuaries at start.
Money purchase pension plans don’t use them at all.
What type of pension plans use individual accounts?
Defined contribution ones: target benefit and money purchase.
What is the maximum payout from the PBGC?
$6034 per month, about 72K/year.
What are the 3 types of QP’s that don’t use PBGC insurance?
Profit sharing plans, defined contribution plans, defined benefit plans in the professional service sector for firms with 25 or fewer employees.
What type of QP can grant benefit for prior years of service?
Granting this benefit requires what contingency?
Only DB plans can grant credit for prior service. If they do they must grant it to all employees (it must be non-discriminatory).
What is “permitted disparity” or “social security integration”? What type of plans can use it?
Permitted disparity means the plan gives larger contributions to those who earn more than the social security wage base.
All QPs can do this but DC plans can only use one method.
What is the “excess method” of social security integration?
What type of plans can use it?
An increased % benefit is given to those whose income exceeds an average of the SS wage base.
The benefit, only applied to income above the average SS wage base is the lesser of .75% per year of service, or the benefit % for earnings below the average SS wage base. It applies for a max of 35 years, so the max benefit is 26.25%
DB and DC plans can use this method.
What is the offset method?
The offset method is the other method used to calculate social security integration.
It reduces the benefit on income within the social security wage base. The results work out similar to the excess method and the max reduction, 26.25% is the same.
What are the flat amount, flat %, and unit credit formulas?
Methods of calculating defined benefit plan benefits. Unit credit is a combination of the other two, for ex: % salary x number of years worked.
What are (non)cash balance plans?
Whom do they benefit the most?
Do they have a guaranteed rate of return?
Do they have a guaranteed rate of return?
$balance plans are DB plans with hypothetical individual accounts, they’re replacing other DB plans because they’re cheaper to run.
They benefit younger workers because their benefit has a years of service component.
They do have a guaranteed rate of return.
What are money purchase pension plans?
What is the funding mechanism?
Is a retirement benefit guaranteed?
Money purchase are DC plans, in which an employer contributes a % to EE’s individual account each year. Benefits younger EE’s because there’s more compounding periods.
There is no guaranteed retirement benefit—Money Purchase are DC plans.
What are target benefit pension plans?
Who do they benefit most?
Why is there no defined benefit?
Target benefits are DC plans in which ea. EE gets a contribution to an individual account based on the actuarial present value of their retirement benefit. This benefits older EE’s.
EE gets their account balance to retire on whether it’s above or below the target benefit, thus no defined benefit.
Profit Sharing Plan Basics:
- Withdrawals when?
- Contributions how?
- Contribution limit?
- When can they be started?
Withdrawals after 2 years.
Contributions at ER’s discretion, but must be recurring and substantial. Contribution limit = 25% of covered comp.
Contribution is usually a % of salary.
Can be started at tax deadline, with extensions, of the following year.
How do profit sharing plans do permitted disparity?
What is the maximum excess?
They use the excess method. They have a base rate contribution, and an additional rate for income above the SS wage base up to $290,000. The maximum additional rate is 5.7%.
The excess rate is the sum of the base rate and permitted disparity.
How do New Comparability plans work?
They make contributions to employees accounts based on their position in the company.
They can be expensive to administer.
