Retirement Plans Flashcards
Defined Benefit Pension
Favors older employee/owner (age 50+)
Guaranteed retirement benefit amount (can meet a set retirement objective)
Requires very stable cash flow
Past service credits allowed
Example sentence: A Defined Benefit Pension plan provides a guaranteed retirement benefit amount based on a set retirement objective.
Money-Purchase Pension
Requires annual employer contribution that is flat percentage of each eligible employee’s compensation
Max is $345,000 per employee
Employer can only DEDUCT up to 25% of total eligible payroll
Would choose this plan because:
want to retain key employees
want simplicity and easy administration
Employees are young and well-paid
Stable cash flow needed. Contributions are mandatory
Target Benefit Pension (DC)
Max contribution is lesser of 100% of comp or $69,000
Up to 25% employer deduction
Forfeitures can be reallocated to participants or used to reduce employer contribution
Employee assumes investment risk
Fixed, mandatory contributions
Stable cash flow needed
Favors older employees (adequate retirement benefits)
Has lower cost and simplicity
Profit Sharing Plan (DC)
Up to 25% employer deduction
Flexible contributions (must be recurring and substantial)
401(k) provisions $23,000 (FICA) (hardship withdrawals)
SIMPLE 401(k) is exempt from creditors - see SIMPLE for additional information
Good for when:
Employer profit/financial stability is variable
Incentivize employees to make company profitable
Young, well-paid employees with substantial time to save
Stock Bonus Plan
Up to 25% employer deduction
Flexible contributions
100% of the contribution can be invested in company stock
ESOP cannot be integrated with Social Security or cross-tested
No additional information.
SIMPLE IRA
For small employers (100 or fewer employees)
Requires employer match (immediate vesting)
Salary reduction limit up to $16,000 (FICA)
Company cannot have another plan
No additional information.
SEP IRA
Up to 25% contribution for owner (w-2) / up to 18.59% contribution for self-employed
Account immediately vested
Can be integrated with Social Security
Special eligibility: 21+ years old, paid at least $750, and worked 3 of the 5 prior years
No additional information.
SARSEP
May have up to 25 employees, and 50% of the eligible employees must defer
Must have been in existence before 12/31/96 (grandfathered)
Salary deduction limit $23,000 (FICA)
New employees may participate in a SARSEP if it was established before 1/1/97
No additional information.
403(b)
For 501(c)(3) organizations and public schools
Subject to ERISA only if employer contributes
Salary reduction limit up to $23,000 (FICA)
Employer contributions may be subject to vesting schedule
No additional information.
Qualified Plans
May NOT discriminate
Many ERISA requirements
Immediate tax deduction for contribution (though may not be vested)
Earnings accrue tax deferred until distribution
Distributions are taxable at ordinary tax rates with the exception of 10yr averaging and NUA under stock bonus, ESOP, and 401ks
Qualified Plan Types
Defined Benefit Pension (cash balance plan)
Defined contribution:
Money-purchase pension
Target benefit pension
Profit sharing plan
Stock bonus plan (ESOP)
Keogh Plan (self-employed DC or DB)
Nonqualified Plan
May discriminate
Exempt from ERISA requirements
No employer tax deduction for contribution until employee is taxed
Plan earnings are taxable to employer
Distributions taxable at ordinary tax rates
Nonqualified Plan Types
SIMPLE IRA
SEP IRA
SARSEP
403b/TSA/TDA
457 plan (nonqual deferred comp)
401k (DC)
Qualified profit sharing or stock bonus plan. Elective deferrals are subject to FICA and FUTA taxes, but not federal withholding. 23k/yr and 7.5k catch up.
Good for when:
Employer can only afford minimal extra expense
Employees want to increase tax-deductible savings
Which CANNOT integrate with social security?
ESOP and SIMPLEs
