Retirement Planning

Question 1

Features Common to All DC Plans

Answer 1

1. Participant-directed accounts
2. Combined EE/ER contributions subject to annual additional imit of $61k
3. Max compensation considered in benefit formula $305k (2022)
4. Participant bears investment risk
5. No guaranteed final benefit amount
6. Vesting must be at least as generous as 3-year cliff, or 2-6 year graded
7. Max deductible employer contribution is 25% covered payroll
8. Tends to favor younger participants
9. Easy for participants to understand
10. No PBGC insurance
11. Participant forfeitures may be reallocated to remaining participants or used by employer to offset plan expenses

Question 2

DC Profit Sharing Plans

Answer 2

1. Traditional Profit Sharing
2. 401k
3. Stock Bonus Plan
4. Employee Stock Option Plan (ESOP)

Question 3

DC Pension Plans

Answer 3

1. Money Purchase Pension Plan
2. Target Benefit Pension Plan

Question 4

DB Plans

Answer 4

1. Traditional DB pension
2. Cash Balance Pension Plan

Question 5

Features common to all DB Plans

Answer 5

1. Only plans that guarantee the final benefit
2. Maximum annual pension $245k (2022)
3. Maximum compensation considered in benefit formula $305k (2022)
4. Only qualified plans insured by PBGC
5. Must vest at least as generously as 5-year cliff or 3-7 year graded (Cash Balance plan my use ONLY 3-year cliff vesting)
6. Must have joint and survivor payout unless waived
7. 100% employer funded; MANDATORY annual employer contributions
8. Funding limit is “whatever it takes” to provide guaranteed benefits; NO predetermined annual limits
9. No participant-directed accounts; sponsor bears investment risk
10. No predetermined maximum deductible employer contribution
11. ANNUAL actuarial work required to determine needed funding each year
12. DB plans are the most administratively expensive
13. Can favor older participants at plan

Question 6

Additional features of Cash Balance Plan

Answer 6

1. “Hypothetical” participant accounts for record keeping; not participant-directed
2. Guaranteed benefit is a guaranteed cash balance at plan’s normal retirement age based on the plan design
3. Each year participant accrues a plan contribution based on a “pay credit” (percentage of compensation) plus an “interest rate credit”
4. Provided uniform benefit accrual for all employees
5. Participant can convert guaranteed cash balance into lifetime pension
6. Considered easier for participants to understand than a traditional defined benefit pension plan

Question 7

Additional features of Traditional Defined Benefit Pension Plan

Answer 7

1. Guarantees a monthly pension
2. Older, high-earning participants can have substantial funding on their behalf
3. Common pension formula is a percentage of pay times the number of years of service
4. No individual accounts
5. Accruing a benefit of any amount is “active participation” for IRA deduction purposes
6. If participant is married the pension must be joint and survivor unless spouse waives (notarized)

Question 8

Key Features of 403(b) Plans

Answer 8

1. Special catch-up with 15 Years of Service
   - minimum 15 years with the sponsoring school or 501(c)(3) employer
   - additional deferral allowance up to $3,000 per year
   - May be used in the same year as 50+ catch-up
   - Age 50+ w/ 15 years of service my defer up to $30k
2. Deferrals are AGGREGATED w/ other plan deferrals in applying annual maximums
3. Limited investment choices:
   - Mutual Funds
   - Annuities

Question 9

Key Features of 457(b) Plans

Answer 9

1. Governmental only age 50 catch-up
2. Special Catch-up
   - Available for LAST THREE YEARS of service (at plan normal retirement age)
   - Up to TWICE the normal contribution limit ($41k in 2022)
   - Age 50+ catch-up may NOT be used in the same tax year special catch-up is used
3. NO 10% penalty for withdrawal prior to age 59.5
4. Deferrals are NOT aggregated w/ other salary deferrals in applying annual maximums
5. NOT considered an “active participant” for IRA deduction purposes.

Question 10

Traditional Profit Sharing Plan Features

Answer 10

1. Flexible year-to-year employer contributions
   - no requirement for contribution every year
   - must be “SUBSTANTIAL AND RECURRING” contributions
   - i.e. 3 of last 5 years;
   - 100% employer funded
2. Yearly profit is not required for employer contributions to be made; can be made from retained earnings or cash flow
3. Typically allows in-service hardship withdrawals and loans to participants
4. May invest 100% in employer stock
5. Typically not subject to QJSA
6. “Age-weighted” trad. profit-sharing plan can skew higher plan contributions to older participants

Question 11

Section 401(k) Features

Answer 11

1. “Cash or Deferred Arrangement (CODA)” provision added to underlying profit-sharing plan (most common), stock bonus plan, or ESOP
2. Participant can make annual elective deferrals up to the lesser of 1) 100% of compensation 2) $20,500.
   - Age 50+ can make additional catch-up contribution of $6,500 per year (catch-up contributions ARE NOT included in the annual additions limit)
3. Employer is not required to contribute annually but usually makes some type of matching contribution
   - Employer could also alternatively make a separate profit-sharing contribution
4. Plans often offer participant loans and hardship withdrawals
5. As a profit-sharing plan employer contribution can be 100% employer stock
6. Participant must be given a minimum of 3 diversification alternatives for elective deferrals
7. If employee participates in multiple 401(k) plans at different jobs, the elective deferrals are aggregated in applying the annual maximum
8. Employee contributions are subject to ADP testing
   - Employer contributions are subject to ACP testing

Question 12

Money Purchase Pension Plan Features

Answer 12

DC Plan!
1. Mandatory annual employer contributions - 100% employer funded

2. Defines the employer contributions - typically a percentage of employee’s compensation
3. May invest no more than 10% in employer stock
4. Typically, no in-service withdrawals until age 62
5. Subject to QJSA (joint survivor annuity)

Exam tips: Employer objectives to watch for as a match for a money purchase pension plan:

• The employer wants a plan that is easy for participants to understand with stated guaranteed contributions,
• The employer wants the employees to bear the investment risk, and
• The census has younger participant.

Question 13

Target Benefit Pension Plan Features

Answer 13

DC Plan!
1. Requires mandatory annual employer contributions - 100% employer funded

2. In the plan design an actuary determines contributions based on participant age at plan entry to reach target benefit
3. A plan that can skew higher plan contributions to older participants
4. Actuary is used ONLY in the initial year
   - contributions are NOT adjusted each year
   - Final benefit amount is not guaranteed; it is a TARGET
5. May invest no more than 10% in employer stock

Question 14

Early Retirement Formula (reduced benefit)

Answer 14

• 5/9% for each of first 36 months worker is claiming benefits prior to FRA +
• 5/12% for each month OVER 36 months worker is claiming benefits prior to FRA up to an additional 24 months

Result = 10% reduction for 24 months and 20% reduction for 36 months = 30% current maximum reduction from FRA (67) (taking benefits at age 62)

Question 15

SS Delayed Retirement Formula (increased benefit)

Answer 15

• 2/3% per month for max of 36 months
• Total = 8% per year, or 24% max increase up to age 70

Question 16

Social Security Benefit Taxation

Answer 16

Formula:
1/2 Social Security Benefits + Tax Exempt Income + AGI = Provisional Income

MFJ
- 50% taxable: $32k - $44k
- 85% taxable: > $44k

Single
- 50% taxable: $25k - $34k
- 85% taxable: > $34k

MFS*
- 85% taxable: > $0

• Applies only if living in the same household during the year