RP & EB - Chapter 2 - Pension vs Profit Sharing Plans Flashcards
PBGC - Pension Benefit Guaranty Corporation
Pays the “promised pension” for defined Benefit plans
- $6,750 per month or $81,000 per year
2 Defined Benefit Pension Plans
All Pension Plans:
- REQUIRE min contributions
1) Defined Benefit Pension Plan
- Actuary required annually
- Favors older entrants but more expensive
2) Cash Balance Pension Plan:
- Actuary required annually
- Account employee sees is merely a hypothetical account.
- Offers a guaranteed min investment return
- Must use 3-yr Cliff vesting schedule
- Conversion to Cash Balance plans are popular to get rid of old, more expensive traditional DB Plans
- benefits younger and less expensive
2 Defined Contribution Pension Plans
3) Money Purchase Pension Plan:
- Fixed % contribution of salary
- no actuary needed
- benefits younger and less expensive
4) Target Benefit Pension Plan:
- type of Money Purchase Plan where contribution is determined by the benefit that WILL be paid at retirement.
- Actuary required initially (but not annually)
- benefits older but more expensive
*For both, Contribution Limit:
- Employer cannot deduct contributions > 25% of total employer contributions they provide
- Employer contributions limited to Lesser of:
100% of employee’s salary -OR-
$66,000
Permitted Disparity - Profit Sharing Plans
- Permitted Disparity equals: LESSOR of 2x Base Rate
or 5.7% higher than Base Rate.
**Exam Tip:
Base rate + Permitted disparity = Excess rate
BP = Exxon
*Excess Method applies to both Defined Benefit & Defined Contribution Plans. Offset Method is ONLY for Defined Benefit
7 Profit-Sharing Plans
Profit Sharing Plans:
- Employee generally cannot contribute unless CODA
- Employer contribution amounts are discretionary.
1) Profit Sharing Plans:
- can have CODA attachment but still allows employer to contribute. Limit contributions still subject to $66,000 ($73,500 if 50 or over for Catch-up)
2) Stock Bonus Plans: employers contribute stock on behalf of their employees
3) ESOPs: special form of stock bonus plan. Rewards employees with ownership in corp and significant tax advantages.
Key feature: trust may borrow $ from bank to purchase employer stock. Allows owners of closely held businesses to sell their interest and defer recognition of capital gains
4) Cash or Deferred Arrangements (CODA - 401K Plans):
- allows employees to defer salary pre-tax
- no eligibility requirement for employee contribution. Any employer matching must vest at least as generous as 2-to-6yr.
- Employee Deferral limits: $22,500 (trad or Roth), $7,500 Catch-up (age 50 or older)
5) Roth Thrift Plans (TSP): Roth 401(k), governments version of a Roth IRA - after-tax contributions.
6) Age-based Plan: both age and compensation
- Cross Test
7) New Comparability Plan: contributions based upon employee’s classification in the company
- Cross Test
ADP & ACP Tests (CODA)
2 Additional Nondiscrimination Tests plans with CODA provisions MUST meet.
1) ADP Test - Actual Deferral % Test:
ensures NHC employees are not discriminated against. Goal is to either limit HC’s from deferring significantly more than NHCs -OR- raise amount being received by NHCs
*ADP chart in Dalton flashcards
2) ACP Test - Actual Contribution % Test:
solely to determine if NHCs are discriminated against.
Tests the sum of both employee and employer contributions.
*Calculate same way as ADP.
*Alternative to these is the Safe Harbor 401(k) plan provision
Safe Harbor 401(k) Plan
- Safe Harbor provision can be enacted in lieu of the annual ADP/ACP Tests that CODA plans have to pass.
Two options:
1) Employer makes Non-elective minimum contribution of 3% employee compensation. 100% vested.
2) Employer matches employee Elective deferrals, 100% of first 3% and 50% greater than 3% and less than 5%.
Adv & Disadv of ESOP’s
Stock Bonus vs ESOP
