Retirement Planning Flashcards
Types of Defined Contribution Plans
- Traditional Profit Sharing Plan
- Section 401(k) Plan
- Stock Bonus Plan
- ESOP
- Money Purchase Pension Plan
- Target Benefit Pension Plan
All profit sharing plans are (DC/DB) plans
DC
Defined Contribution Plan Characteristics
- Participant-directed accounts
- Participant bears investment risk
- No guaranteed final benefit amount
Defined Contribution Plan
Maximum Compensation Considered in Benefit Formula
$305,000
Defined Contribution Plan
Vesting
Must be at least as generous as 3-year cliff or 2-6 year graded
Defined Contribution Plan
Maximum Deductible Employer Contribution
25% of covered payroll
Defined Contribution Plan
Maximum Elective Deferral
$20,500
Defined Contribution Plan
Annual Additions Amount
$61,000
Vesting in a defined contribution plan starts on the date of:
- hire
- enrollment in the plan
hire
What’s included in the annual additions limit?
- Employee deferrals
- Employer contributions
- Reallocated forfeitures
Defined contribution plans benefit (younger/older) participants
younger (more time to accumulate)
Defined contribution plans (do/do not) require mandatory employer contributions
do (not good for companies with uneven cash flow)
Traditional Profit Sharing Plan
Employer Contribution Requirements
- flexible
- no requirement for a contribution every year
- contribution must be “substantial and recurring”; 3 out of last 5 years
- 100% employer funded
Traditional profit sharing plans (do/do not) allow for hardship withdrawals and loans to participants
do
Traditional profit sharing plans may invest up to _____% in employer stock
100%
Traditional profit sharing plans (are/are not) subject to Qualified Joint and Survivor Annuity
are not
_____-________ traditional profit sharing plan can skew higher plan contributions to older participants
Age-weighted
Section 401(k) Plan
Participant Elective Deferrals
The lesser of:
- 100% of compensation
- $20,500
Ages 50+ can make additional catch-up contribution of $6,500/year
Section 401(k) Plan
Employer (is/is not) required to contribute annually
is not
Section 401(k) plans may invest in up to ___% company stock
100%
Participants in a Section 401(k) plan must be given at least ___ diversification alternatives
3
If an employee participates in multiple 401(k) plans at different jobs, the elective deferrals (are/are not) aggregated in applying the annual maximum
are
Employee contributions to a 401(k) plan are subject to (ACP/ADP) testing
ADP
Employer contributions to a 401(k) plan are subject to (ACP/ADP) testing
ACP
Money Purchase Pension Plan
Employer Contributions
- mandatory
- 100% employer funded
- determined as a percentage of the employee’s compensation
A money purchase pension plan may invest up to ___% in company stock
10%
A money purchase pension plan (is/is not) subject to Qualified Joint and Survivor Annuity
is
A money purchase pension plan (does/does not) allow(s) in-service withdrawals
no; not until age 62
Target Benefit Pension Plan
Employer Contributions
- mandatory
- 100% employer funded
- actuary determines contributions based on participant age at plan entry
A target benefit pension plan (can/cannot) skew higher plan contributions to older participants
can
A target benefit pension plan uses an actuary (in the initial year/every year)
in the initial year
In a target benefit pension plan, the final benefit amount (is/is not) guaranteed
is not; it is a “target”
A target benefit pension plan may invest up to ___% in company stock
10%
In a target benefit pension plan, contributions (are/are not) adjusted each year
are not
Types of Defined Benefit Plans
- Traditional Defined Benefit Pension
- Cash Balance Pension Plan
Defined Benefit Plan Characteristics
- guarantee final benefit
- only qualified plans insured by Pension Benefit and Guaranty Corporation
- Must have joint and survivor payout unless waived
- No participant-directed accounts
- Sponsor bears investment risk
- Annual actuarial work required
- Must satisfy 50/40 rule
- No predetermined maximum deductible employer contribution
Defined Benefit Plan
Maximum Annual Pension
$245,000
Defined Benefit Plan
Maximum Compensation Considered in Benefit Formula
$305,000
Defined Benefit Plan
Vesting Schedule
Must be at least as generous as 5-year cliff or 3-7 year graded
*Cash balance plan may only use 3-year cliff
Defined Benefit Plan
Suitabilty
- benefit guarantees are desired
- PBGC insurance coverage is needed
- skew benefits to older participants
Defined Benefit Plan
Funding Limits
“whatever it takes” to provide guaranteed benefits
Traditional Defined Benefit Pension Plan
- guarantees a monthly pension
- older, higher earning participants can have substantial funding on their behalf
- typically uses a formula based on number of years of service
- no individual accounts
- accruing a benefit of any amount is “active participation” for IRA deduction purposes
Traditional Defined Benefit Pension Plan
Disadvantages
- expensive
- mandatory annual funding
Cash Balance Pension Plan
- guarantees a specific cash balance at the plan’s stated normal retirement age
- “hypothetical” participant accounts for record-keeping; not participant-directed
- each year, participant accrues a plan contribution based on a “pay credit” (percentage of compensation) plus an “interest rate credit”
- provides uniform benefit accrual for all employees
- participant can convert guaranteed cash balance into lifetime pension
- considered easier for participants to understand than a traditional defined benefit pension plan
Cash Balance Pension Plan
Vesting Schedule
Can only use 3-year cliff vesting, or better
A tax-advantaged salary reduction retirement plan often used by Section 501(c)(3) tax-exempt organizations
403(b)/TSA
Section 403(b) Plan
Employee Deferrals
- Up to $20,500 per year
- Ages 50+ catch up contribution of $6,500
Section 403(b) Plan
Special Catch Up
- Employees with a minimum of 15 years of service with sponsoring employer
- Additional deferral of up to $3,000 per year
- May be used in the same year as the 50+ catch up
Section 403(b) Plan RMD Age
72
Section 403(b) Plan
Early Withdrawal Penalty
10% if distributed prior to 59 1/2
Section 403(b) Plan
Aggregation
Aggregated with other plan deferrals in applying annual maximums
403(b) Plan Investment Options
Only mutual funds and annuities
Tax-advantaged salary reduction retirement plan used by government and certain non-profit agencies
Section 457 Plan
Section 457 Plan
Employee Deferrals
- Up to $20,500 per year
- Ages 50+ get a $6,500 catch up
Section 457 Plan
Special Catch Up
- Available for last three years of service (at normal plan retirement age)
- Unused deferrals from past service
- Up to twice the normal contribution limit ($41,000) per year
- The age 50+ catch up may NOT be used in the same tax year as the special catch up
Section 457 Plan RMD Age
72
Section 457 Plan
Aggregation
Not aggregated with other salary deferrals in applying annual maximums
Section 457 Plan
Active Participant Status
Not considered an “active participant” for IRA deduction purposes
