PENSIONS (34 QUESTIONS) Flashcards
What does the term “Pension Plan” usually describe?
Two types of retirement savings plans:
(1) A defined CONTRIBUTION plan; or
(2) A defined BENEFITS plans.
What is a defined CONTRIBUTION plan?
A defined contribution plan focuses on the contribution that is being made for each individual employee.
What is the known factor in a defined contribution plan?
It’s the CONTRIBUTION rather than the BENEFIT, is the known factor.
The benefit is dependent upon the payments actually made into the plan together with the earnings on this money.
How is an employee’s account funded in a defined contribution plan?
The employee’s account is funded by both the employer and the employee.
What happens to the funds being made to an employees account in a defined contribution plan?
The funds are segregated to the account of the employee. At retirement, the account balance may be distributed or withdraw as permitted by the plan (i.e. as an annuity or as a lump sum)
Is a defined contribution plan easy to value?
A defined contribution plan is easy to value because it is based upon the total of employee/employer contributions to the individual account, together with any earnings on these contributions.
How does a defined contribution plan work?
The defined contribution plan works like a savings or investment account.
Is it necessary to value a defined contribution plan?
No need for a present value because the value of the account is its current balance.
What risks do employees assume with a defined contribution plan?
Employees assume the investment risks and the risk that they may outlive the amount in their accounts at retirement.
What are two popular defined contribution plans?
401k and 403b
Why are 401k and 403b the most popular defined contribution plans?
These are the most popular because employers prefer the risk of funding retirement be born by employees. These plans are NOT insured by the Pension Benefit Guarantee Corporation (PBGC).
What is Pension Benefit Guarantee Corporation (PBGC) ?
PBGC insures most private-sector (i.e., non-governmental) defined benefit pension plans. When a PBGC-covered single-employer plan fails, PBGC pays participants their earned benefits up to certain legal limits.
What is the premise of defined BENEFITS plans?
It is premised upon a guarantee by the employer that the employee will, at retirement, receive a specific benefit determined in advance by a pre-established formula, usually payable on a monthly basis. Some plans also offer an alternative payment option, such as lump sum.
How are employee contributions determined in a defined BENEFITS plan?
Employee’s contributions are determined actuarially (life expectancy) on the basis of the benefits expected to be payable
How is the benefit funded in a defined BENEFITS plan?
The benefit is funded by employer contributions that are actuarially determined on a participant class basis
What does actuarially mean?
Relating to statistical calculation especially of life expectancy
How does a defined benefits plan work?
The defined benefit plan works like an insurance policy and provides an efficient way for individuals to save for retirement, and the entitlement to the benefit is triggered by a particular event – retirement
How is the benefit determined in a defined benefits plan?
The benefit is determined by a formula that typically references salary history and years of service.
What are the different retirement benefit calculations in a defined benefits plan?
Retirement benefits depend on a calculation of average earnings either under a final-average or career-average formula.
What is a final average formula to determine the calculation of retirement benefits under a defined benefits plan?
The final-average formula bases the level of benefits on “earnings averaged, for example, over the last three years of employment or over the three consecutive years in a ten year period immediately prior to retirement in which earnings are the highest.
What is the career average formula to determine the calculation of retirement benefits under a defined benefits plan?
The career-average formula “bases benefits on earnings averaged over the entire career of employment.
Can an employee contribute to a defined benefits plan?
Employee may or may not contribute to the defined benefits plan, but any contributions are usually fixed.
Are employer contributions fixed under a defined benefits plan?
Employer’s contributions are not fixed and may be higher or lower depending on how the plan investment’s perform in order to pay the promised benefits.
What happens if there are insufficient funds to pay the benefit under a defined benefits plan?
If there are insufficient funds to pay the benefit, the employer has to make up the difference.
If there are insufficient funds to pay the benefit under a defined benefits plan and the employer has to pay the difference, what does their cost include?
The employer’s cost include the amount necessary to provide the benefit and the administrative and actuarial expenses.
Are contributions made for each individual participant in a defined benefits plan?
Contributions are not made for each individual participant. No funds are segregated for any particular employee, since defined benefit plans do NOT include separate accounts for each employer, nor does an employee have a specific percentage of the whole.
Are defined benefits plans insured?
Defined benefit pensions are insured against default by the Pension Benefit Guarantee Corporation PBGC and employers pay insurance premiums per employee for each employee participating in the plan
Who pays insurance premiums to insure defined benefits plans?
Employers pay insurance premiums per employee for each employee participating in the plan.
Do defined benefit plans assume payments of a predetermined pension benefit to the employee upon retirement during the remainder of the participant’s life?
Defined benefit plans often include a survivor option providing for a reduction in the benefit so that payments will continue to the surviving spouse after the employee’s death.
How is the marital component of a defined benefits plan determined?
The marital component of a defined benefit plan is based upon the coverture fraction of denominator being the total # of years employee earned pension benefit with employer and the numerator being the total # of those pension credited years which the parties were married
What is the coverture fraction to determine marital component of a defined benefits plan?
OF PENSION CREDITED YEARS PARTIES WERE MARRIED
__________________________________________
# OF YEARS EMPLOYEE EARNED PENSION BENEFIT WITH EMPLOYER
What do actuaries determine?
Actuaries determine present value of defined benefit to be received in future based upon various methods.
What must evaluators consider when determining present value of defined benefits to be received in the future?
Interest & Inflation
What are the different methods actuaries use to determine present value of a defined benefits plan?
- Term Method
- Time Method
- Salary or Compensation Method
- Plan Termination Method
What is the term method to determine present value of a defined benefits plan?
The term method presumes the employment of the wage earner terminates as of separation or other specified date, thereby fixing the benefit at that date. Produces an artificially low value if employment in fact continues because the marital property component will invariably increase between valuation date and actual retirement due to salary increases and other factors
What is the time method to determine present value of a defined benefits plan?
The time method presumes wage earner’s employment will continue until retirement age, but at the same benefit level at separation. While it produces a higher value than term, its still artificially low because the wage earner usually receives increases in both wages and plan benefits between the valuation date and actual retirement. However, such increases have been held to be separate property of the employee spouse and not marital property
What is the salary or compensation method to determine present value of a defined benefits plan?
The salary and compensation method is similar to the time method, but assumes salary increases (comparable to those existing before separation) will continue to occur from date of valuation to actual retirement. This method produces the most accurate estimate of what wage earner will probably receive in retirement benefits
What is the plan termination method to determine present value of a defined benefits plan?
The plan termination method presumes pension plan itself terminated as of the date of separation or other valuation date. It’s appealing because it is easy to use and perceived that expert valuation can be avoided by simply using current Pension Benefit Guarantee Corporation (PBGC) tables. However, these tables were not intended for this and produces an artificially low valuation because wage earner’s benefits are not actually being terminated and benefits will probably increase because of salary raises and upgrading of plan.
What is the criticism or concern with using the term method to to determine present value of a defined benefits plan?
Term method produces an artificially low value if employment in fact continues because the marital property component will invariably increase between valuation date and actual retirement due to salary increases and other factors
What is the criticism or concern with using the time method to to determine present value of a defined benefits plan?
While the time method produces a higher value than term, its still artificially low because the wage earner usually receives increases in both wages and plan benefits between the valuation date and actual retirement. However, such increases have been held to be separate property of the employee spouse and not marital property
What is the plan termination method to determine present value of a defined benefits plan?
It’s appealing because it is easy to use and it is perceived that expert valuation can be avoided by simply using current Pension Benefit Guarantee Corporation (PBGC) tables. However, these tables were not intended for this and produces an artificially low valuation because wage earner’s benefits are not actually being terminated and benefits will probably increase because of salary raises and upgrading of plan.
What is the salary or compensation method to to determine present value of a defined benefits plan?
This method produces the most accurate estimate of what wage earner will probably receive in retirement benefits.
Which method of determining present value for a defined benefits plan is considered most accurate?
The salary and compensation method.
What is another defined benefit retirement plan?
Cash balance plans
What is a cash balance plan?
A defined-benefit plan with many features of a defined-contribution plan.
The employee has an account that consists of his contributions as a specified rate of interest.
Why is a cash balance plan considered a defined benefit plan?
It is a defined benefit plan because the employer bears the investment risk and guarantees a particular benefit at retirement. If the account earns more interest that the funds necessary to pay the benefit, the employer keeps it; if it earns less, the employer assures the benefit amount.
Are cash balance plans insured?
Yes - by the PBGC.
How are pensions defined under ERISA?
ERISA defines pensions as any plan maintained by an employer that provides retirement income to employees.
When are pension benefits “vested”?
A pension is considered vested if the employee has an absolute un-forfeitable right to receive a payment at retirement, even if the employee terminates employment prior to normal retirement age.
What is a qualified plan?
A qualified plan is one which is deductible by the employer and not currently taxable to the employee.
What factors will increase the benefit of a pension?
Over the years, the benefit will usually increase as a result of a number of factors i.e. seniority of employee, salary, productivity, inflation.
When has a pension “matured”?
Pension benefits have “matured” when the employee is eligible to receive payments, generally at retirement age.
Can a maturity date be determined in advance?
A maturity date may not be determined in advance because employees may be offered the option of accelerating or deferring retirement, based upon the needs of the employer.
Pension benefits that have not matured are usually contingent based on what factors?
Continued employment, remains alive, vested.
What is a domestic relations order?
A judgment, decree or order that relates to property settlement, child support, alimony payments to a spouse, child or other dependent of a plan participant and is made pursuant to state domestic relations law.
What is a qualified domestic relations order (QDRO)?
A Domestic Relations Order creates or recognizes the rights of an alternate payee to receive all or a portion of the benefits payable to a participant under the plan.
What is required in order to be “qualified”?
The order must contain a certain required information and may not alter the amount or form of plan benefits (i.e. survivor’s benefits cannot be awarded if the plan does not provide for such benefits)
Who is an alternate payee
The spouse, former spouse, child or other dependent of a participant who is recognized by the order as having the right to receive all or a portion of the participant’s benefit.
What is ERISA and what does it do?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
What does ERISA NOT cover
Does not cover military or government retirement plans, plans maintained for worker’s compensation or unemployment, church plans or IRAs.
Do employers have incentive to establish and maintain plans covered by ERISA?
Yes - because it allows them to take tax deductions on contributions that they make on behalf of participating employees. Participating employee’s contributions towards their plans and the earnings on the contributions are also tax-deferred
What are the benefits to employers to maintain plans covered by ERISA?
(1) Employer can take deductions on contributions they make on behalf of participating employees; and
(2) Participating employee’s contributions towards their plans and the earnings on the contributions are also tax-deferred
What MUST ERISA maintained plans do?
They must expressly prohibit the assignment or alienation of benefits, which is to protect employees from their own financial imprudence and to protect them from others who might use their retirement plans as a means to retaliation, as employers frequently did before ERISA.
What has the supreme court ruled with respect to the spendthrift provision to protect pensions from employee wrong doing?
Supreme Court has held this spendthrift provision protects pensions from the employees own wrongdoing even if a judgment is entered against him or even if he files for bankruptcy.
Does ERISA preempt state community property law?
YES - ERISA preempts state community property law
What was the proposition of the Supreme Court case Boggs v. Boggs, 520 US 833?
ERISA pre-empts a state law allowing a nonparticipant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits.
Brief Facts:
Respondents are the sons of Isaac and Dorothy Boggs. After Dorothy’s death in 1979, Isaac married petitioner Sandra Boggs. When Isaac retired in 1985, he received various benefits from his employer’s retirement plans, including a lump sum savings plan distribution, which he rolled over into an individual retirement account (IRA); shares of stock from the company’s employee stock ownership plan (ESOP); and a monthly annuity payment. Following his death in 1989, this dispute over ownership of the benefits arose between Sandra and the sons. The sons’ claim is based on Dorothy’s purported testamentary transfer to them, under Louisiana law, of a portion of her community property interest in Isaac’s undistributed pension plan benefits. Sandra contested the validity of that transfer, arguing that the sons’ claim is pre-empted by the Employee Retirement Income Security Act of 1974 (ERISA).
In United States Supreme Court case of Boggs v. Boggs, 520 US 833 (1997), SC held that allowing Dorothy Boggs’s—first and deceased wife of Isaac Boggs—testamentary transfer of her community property interest in Isaac’s pension plan to her sons (who sued Sandra for pension benefits because of Dorothy’s will) would thwart the intent of ERISA’s survivor’s annuity and take away Sandra Boggs’s—the second wife married to Isaac at time of Isaac’s death–right to the annuity that she was entitled to receive as Mr. Boggs’s surviving spouse. What was the issue?
ERISA pre-empts a state law allowing a nonparticipant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits; and
Dorothy’s testamentary transfer violated ERISA’s prohibition on the assignment or alienation of plan benefits intended for plan participants and their beneficiaries.
Under ERISA - who are the are beneficiaries of the plan participant?
Surviving spouse;
A living former spouse;
A child; or
Another dependent—as long as one or more of these persons are designated as a beneficiary in the QDRO
Is a will considered a QDRO?
No - not under Boggs v. Boggs which is why her sons could not be considered beneficiaries
In Boggs v. Boggs, when did Dorothy (Wife #1)’s interest terminate?
When she died
In Boggs v. Boggs, how did Wife #2 acquire her rights to Mr. Boggs’ pension?
Her interest in those same benefits existed by virtue of ERISA’s qualified-joint-survivor-annuity provision
What is the Retirement Equity Act of 1984 (REA)?
It amended ERISA of 1974 and IRC to provide greater protection to employees, widowers/widows and divorced spouses.
What protections did REA include?
- Requirement that employee provide a survivor annuity for the spouse unless spouse consent in writing to waive that right;
- Provide for allocation and distribution of pension benefits incident to a divorce;
- Reduces age from 25 to 21 when an employee becomes eligible to participate in plan;
- Permits employee to take a break in service of the greater of 5 years or the years of prior service before returning to work without losing credits for vesting purposes;
- Maternity and paternity leave without losing pension participant credits;
What happens when a plan participant earns a nonforfeitable right to any part of his or her accrued pension benefits?
The participant’s spouse will receive a survivor’s annuity if the participant predeceases the spouse.
What happens when a participant’s spouse receives a survivor’s annuity if the participant predeceases the spouse?
The plan administrator must pay the surviving spouse between 50% and 100% of the participant’s benefits
What is it called when the plan administrator must pay the surviving spouse between 50% and 100% of the participant’s benefits upon participants, death?
A qualified joint-and-survivor annuity.
When can a survivor annuity be waived?
If a writing is executed by the plan participant and his spouse and the writing is either notarized or the signing is witnessed by a plan representative.
What happens when to a surviving spouses’ annuity upon death?
The annuity terminates.
Can a surviving spouse bequeath their annuity benefit?
NO - the surviving spouse cannot bequeath the annuity benefits.
What law regulates pensions?
Pensions are regulated by federal law that preempts state statutes
What happens when a state law provides for automatic revocation of beneficiary designations on divorce?
Those provisions are superseded by federal law as to all benefits and plans covered by ERISA.
If a court order awards the plan benefits to someone other that then named beneficiary, when does it take effect?
It is ineffective until the change in beneficiary designation is actually effected.
What does ERISA require be included?
ERISA requires the inclusion of a spendthrift provision that prevents the assignment or alienation of the pension benefits
Why did ERISA mandate the inclusion of a spendthrift provision?
ERISA requires the inclusion of a spendthrift provision that prevents the assignment or alienation of the pension benefits since this sometimes presented conflicts to the plan administrator between the administrator’s duties to plan participant and the beneficiaries, REA eliminated this conflict by expressly providing for the allocation of pension benefits in matrimonial litigation by means of a QDRO.
What is the exception to ERISAs spendthrift clause?
QDROS - bc the Retirement Equity Act of 1984 (REA) specifically exempts QDROs from the preemption clause and anti-alienation provision.
What is the Railroad Retirement Solvency Act of 1983?
The Railroad Retirement Solvency Act eliminated annuity reductions made under prior law when military service was counted as railroad service and was also the basis for benefits under another Federal law. It conformed railroad retirement student benefit provisions to social security student benefit provisions
The Railroad Retirement Act is a Federal law that provides retirement and disability annuities for qualified railroad employees, spouse annuities for their wives or husbands, and survivor benefits for the families of deceased employees who were insured under the Act.
Are benefits under the Railroad Retirement Solvency Act of 1983 marital?
Benefits are marital property subject to ED only to the extent these payments are comparable to private pension benefits that are tied to earnings and career service, and not in the nature of a social welfare plan such as social security.
If a payment under the solvency act is a payments based upon disability replace earning capacity is it marital?
No - it would not be property subject to distribution.
What is the Uniformed Services Former Spouses’ Protection Act?
The Uniformed Services Former Spouse Protection Act is a federal law that provides certain benefits to former spouses of military members. Under this law, former spouses may be entitled to portions of the military member’s retirement pay, medical care, and exchange and commissary benefits.
What does the Uniformed Services Former Spouse Protection Act allow states to do?
It authorizes state courts to award up to 50% of the disposable retired pay to a military spouse so long as parties married 10 years or more.
In what respect does federal law not afford complete protection to military spouse?
If a military spouse pay has been waived in order to receive veterans’ disability payments then that payment is exempt from distribution as marital property on the theory that disability payments are compensation for lost earnings and not subject to ED.
How could a military spouse exclude a portion of their pension from the marital estate?
The participant spouse could simply exclude a portion of their retirement benefits by converting retired pay to disability payments.
When are payments NOT part of ED?
Payments that are based upon disability and to replace earning capacity are not subject to equitable distribution
Are pensions that are received prior to normal retirement age because of the recipient’s disability necessarily a pension disability?
It is not necessarily a “disability pension” unless it replaces lost earnings as opposed to merely accelerating the pension payout.
