Retirement Plans Flashcards
Non Qualified plans
Do not fall under ERISA
May Discriminate Exempt from Erisa No employer tax deduction for contributions until employee is taxed Plan Earnings taxable to employer Distributions taxable at ordinary rates
Qualified plans
May NOT discriminate
Must satisfy ERISA
Immediate tax deduction for employer contribution
Earnings accrue tax deferred
Distributions taxable at ordinary rates ( exception 10 yr averaging and NUA)
Defined Contribution
Individual account for each participant Benefits based on contributions and balance in account Qualified Money Purchase Target Benefit Profit Sharing 401K Stock Bonus ESOP
NonQualified SEP SAR SEP Simple Thrift 403b
Benefits may be inadequate for those that enter plan late (except target benefit and age weighted)
Employees bear risk for choosing investments and returns
Contributions based on salary each year rather than at retirement
minimum funding standards (as low 3 %)
Forfeitures - allocated to participants or reduce employer contributions
Money Purchase Plan - DC
Favors younger employees
flat % contribution based on salary
Only first $265000 can be considered
Employer can only deduct 25% of total plan compensation (payroll)
Max contribution lesser of $53,000 or salary
Must have stable cash flow and profit to make contributions
Why choose:
Want a stable workforce (retention)
Simple to administer and explain
Young well paid employees
Target Benefit Pension Plan
Has DB and DC features
Max contribution lesser of 100% salary or $53000
benefit determined by balance
employee assumes risk
No actuarial calculation annually(only at inception)
Forfeitures may be reallocated or used to reduce contributions
DB Qualities
Benefits older employees
Actuary for initial contribution
Fixed mandatory contributions
Alternative to DB plan that still provides adequate benefits to older employees at simplicity and lower cost like a DC plan.
Profit-Sharing
DC
Flexible Contributions up to 25%
Employer does not have to contribute
Must be substantial and reoccurring though (IRS can disqualify)
Individual participant accounts
Forfeitures normally reallocated to participants(can reduce employer contributions but not common)
Contributions pooled and allocated to each investment account
Deferrals subject to FICA
Benefits:
Varying profitability
Incentive to employees to make a profit
Young, well paid employees
401K
AKA: CODA (cash or deferred arrangement) can be profit sharing or stock bonus participants can contribute deferral subject to FICA and FUTA $18000 limit on deferrals. Employer can contribute 100% comp or $53000
Benefits:
Employer can afford minimal benefit above salary and benefits
Employees can increase savings on tax deductible basis
Safe Harbor satisfies non-discrimination tests
Stock bonus
25% Employer contributions
May invest in employer stock
Benefits distributed in stock
Benefits
Co wants to increase ownership in stock
Business continuity planning
Tax advantage means to acquire stock
ALSO SEE ESOP
ESOP
25% Employer contributions
MUST invest in employer stock
Benefits distributed in stock
Employer may deduct dividends (must be paid in cash to participant or bene no later than 90 after close of the plan year or used to make payments on loans or reinvested in co stock)
Benefits
Co wants to increase ownership in stock
Business continuity planning
Tax advantage means to acquire stock
Can be leveraged by employer for borrowing from bank or other financial institution.
S Corp can issue
Contributions used to purchase company stock thereby financing company operations
Cross Testing
Measures DC plans for nondiscrimination on the basis of benefits
Measures DB plans on the basis of contributions
Designed to provide max benefits to highly compensated employees and min benefits to all others based on non discrimination laws
Lesser of 1/3 allocation rate of HCE with highest allocation or 5% NHCE compensation
Defined Benefit
Qualified Guarantees certain benefit at retirement Subject to PBGC employer assumes inflation risk benefits based on past service contributions not attributed to specific employees Must be funded every year
Best for
Older employees
maximize benefits for older controlling employee
415 Limit
Max limit on projected annual benefit
Beginning at age 65:
lesser of $210000 or 100% of participants compensation averaged over 3 highest consecutive working years.
Possible to retire at 62 with no decrease in benefits
Plan Unit Benefit Formula
% per earnings per year of service
Uses service and salary to determine person benefit.
Most frequently used
takes into consideration years of service/salary
Final Average Method
Earnings averaged over a number of years -usually 3 to 5
better match to income in retirement
Only first $265k taken into consideration
Max benefit $210,000
Past Service
service prior to inception of the plan
valuable for setting up a new plan for long-term employees
Can provide for 2% times the final 3 years average salary times all service
DB and cash balance allow
