Retirement Plans - Types of Defined Contribution Plans

Question 1

8 types of DC plans

Answer 1

1. 401 (k) plans
2. Roth 401 (k) plans
3. profit-sharing plans
4. stock bonus plans
5. employee stock ownership plans
6. savings incentive match plans for employees (SIMPLEs)
7. 403 (b) tax-deferred annuities
8. 457 plans

Question 2

401 (k) plans

Answer 2

Permit employees to defer part of their compensation to an individual account set up in the qualified defined contribution plan

Question 3

Types of employers that sponsor 401 (k)s

Answer 3

1. private sector

2. tax-exempt

Question 4

3 tax benefits of 401 (k) plans

Answer 4

1. employees do not pay income taxes on their contributions to the plan until they withdraw funds
2. employers deduct their contributions to the plan from taxable income
3. any investment gains are not taxed until participants receive payments

Question 5

How Roth 401 (k)s differ from 401 (k) plans

Answer 5

1. an employee pays income tax on their contributions

2. Upon retirement, employee withdrawals are not taxed

Question 6

Profit-sharing plans

Answer 6

Set up by companies to distribute a portion of profits to employees by establishing a profit-sharing pool.

Question 7

3 formulas to determine the profit-sharing pool

Answer 7

1. fixed first-dollar-of-profits formula
2. graduated first-dollar-of-profits formula
3. profitability threshold

Question 8

Fixed first-dollar-of-profits formula

Answer 8

Uses a specific percentage of either pretax or after-tax annual profits, contingent upon the successful attainment of a company goal

Question 9

Graduated first-dollar-of-profits formula

Answer 9

Uses a different percentage based on a level of attained profits

Question 10

Profitability threshold formula

Answer 10

fund profit-sharing pools only if profits exceed a predetermined minimum level but have a maximum payout level

Question 11

Allocation formulas

Answer 11

After selecting a funding formula, it must consider how to distribute pool money among employees

Question 12

3 ways of distribution

Answer 12

1. Equal payments
2. Proportional payments to employees based on their annual salary
3. Proportional payments to employees based on their contribution to profits

Question 13

Stock bonus plan

Answer 13

A profit-sharing plan paid in employer stock instead of cash

Question 14

Employee stock option plans (ESOPs)

Answer 14

Provide shares of company stock to employees

Question 15

Nonleveraged ESOPs

Answer 15

The company contributes stock or cash to buy stock, which is then allocated to the accounts of participants. They are stock bonus plans.

Question 16

Leveraged ESOPs

Answer 16

The plan administrator borrows money from a financial institution to purchase company stock. Over time, the company makes principal and interest payments to the ESOP to repay the loan.

Question 17

Savings incentive match plans for employees (SIMPLEs)

Answer 17

For small companies to establish individual retirement accounts (IRAs) or as 401 (k) plans

Question 18

403 (b)

Answer 18

Tax-deferred annuity plans for nonprofit organizations

Question 19

Section 457 plans

Answer 19

Nonqualified retirement plans typically for local or state government employees.

Question 20

4 types of hybrid plans

Answer 20

1. cash balance plans and pension equity plans
2. target benefit plans
3. money purchase plans
4. age-weighted profit-sharing plans

Question 21

cash balance plans

Answer 21

Defined benefit plans that define benefits for each employee by reference to the amount of the employee’s hypothetical account balance. First, the employers’ contributions to cash balance plans are defined. These plans calculate benefits as a period payment (hypothetical balance)

Question 22

Target benefit plans

Answer 22

calculate benefits in a fashion similar to defined benefit plans based on formulas that use income and years of service

Question 23

Money purchase plans

Answer 23

Are defined contribution plans because the benefit is based on the account balance (employer contributions plus the returns on investment of employer contributions) at the time of retirement. However, these plans possess the funding requirements of defined benefit plans, where employers must make annual contributions according to the designated formula for the plan.

Question 24

Age-weighted profit-sharing plans

Answer 24

Are fundamentally defined contribution plans because benefit amounts fluctuate according to the performance of investments of plan assets