Types Of Retirement Plans Flashcards
Types of qualified profit-sharing plans?
Traditional profit-sharing plans Stock bonus plans ESOPs Section 401(k) plans Thrift plans Simple 401(k) Age-based profit-sharing plans New comparability plans
Types of qualified pension plans?
Defined benefit plan Cash balance plan Target benefit plan Money purchase plans DB(k) plans
Types of other tax-advantaged plans?
SEP plans SARSEP plans Traditional IRAS Roth IRAs SIMPLE IRAs Section 403(b) plans
Types of non-qualified plans?
Section 457 Nonqualified deferred compensation Nonqualified stock option Incentive stock option Phantom stock Restricted stock Employee stock purchase plans (ESPP) Junior class shares Stock appreciation rights (SARs)
What are the ERISA requirements for qualified plans?
Coverage Participation Vesting Reporting and disclosure Fiduciary requirements
How are qualified retirement plans tax advantaged?
Employer receives immediate deductibility of all contributions and the employee is not taxed on contributions unless a distribution occurs.
What are the attributes of nonqualified plans?
Discriminate in favor of select employees
Not subject to ERISA requirements
Postponed employer deduction and possible employee deferral of tax
Funding is not required and informal is possible
Distributions are taxed as ordinary income; may be taxed before actual receipt of funds
What are the characteristics of a pension plan?
Employer’s promise to pay a benefit or make a contribution
Mandatory annual funding
In-service withdrawals from certain pension plans are permitted for employees age 62 and over
What are the characteristics of a profit-sharing plan?
The promise to defer taxes
In-service withdrawals are allowed if the plan document permits
Does not require mandatory annual funding, although to remain qualified, the plan must make substantial and recurring contributions
Employer has a deductible contribution limit of 25%
What are the general characteristics of a defined benefit plan?
Commingled account
investment risk is borne by the employer
Defines the benefit the participant will receive at normal retirement
Subject to benefit limits
What are the general characteristics of a defined contribution plan?
Individual accounts
Investment risk is borne by the employee
Defines the contribution formula to be made by the employer for the benefit of the participant
Subject to contribution limits for employees and employers
What are the best plans to provide a savings medium that employees perceive as valuable?
ESOP/stock bonus plan Money purchase pension plan Profit-sharing plan Thrift plan Section 401(k) plan Simplified employee pension (SEP) plan Target benefit pension plan
Why are defined benefit plans the best vehicle to provide adequate replacement income for each employee’s retirement?
It can provide a benefit based on final average compensation, regardless of the employee’s years of service
there is no investment risk assumed by the employee
Employer funding of the benefit is mandatory, subject to underfunding penalties, even if the employer’s profits decline
Which plans weight the allocation of plan contributions to older employees
Defined benefit plans
Age-based profit-sharing plans and target benefit plans are designed to steer benefits towards older employees
which plans create an incentive for employees to maximize performance of the company?
Profit-sharing plan
ESOP/stock bonus plan
Which plans minimize turnover?
Defined benefit plans that use a graduated vesting schedule
Which plans encourage early retirement?
A defined benefit plan that allows benefits to fully accrue after a specified period
Which plans provide the employer with maximum contribution flexibility?
Traditional profit-sharing plans from a contribution standpoint and SEP plans as amounts contributed each year can be entirely at the employer’s discretion.
What are the requirements for a qualified plan?
Must be in writing
Summary plan description must be communicated to employees
Must be permanent
Must not allow or have prohibited transactions
Must include the four elements of a qualified plan
Must cover a broad group of people and not just key employees
Must meet ERIS requirements which are enforced by the department of labor
What are the four elements of a qualified plan?
The plan document provides the terms and benefit amounts provided by the plan
The plan is recognized as a separate legal entity
The trust holds the plan assets and the trustee is typically selected by the employer
The funds become the plan funds and cannot be returned to the employer
What are the eligibility requirements of a qualified plan?
Age 21 and the employee completes 1 year of service (1000 hours) The service requirement can be extended to 2 years if the plan provides imediate 100% vesting of employer contributions upon entry Section 401(k) plans may not use the 2 year requirement - this includes all plans containing a Section 401(k) arrangement
Who may be excluded from a qualified retirement plan?
Union employee whose retirement benefits were negotiated in a separate agreement
Nonresident alien employees who have received no US wages or compensation
What are the requirements for plan entrance dates?
Once an employee has met the eligibility requirements, plan entry occurs on the next available entrance date – but employees can not be made to wait more than 6 months.
What are the coverage test rules?
Then employer must cover at least 70% of all nonexcludable, nonhighly compensated employeess (safe harbor test)
Plans that do not meet the safe harbor test must meet one of two exceptions.
Who is a highly compensated employee?
Meets one of the following criteria;
Was a 5% owner of the employer at any time during the current or preceding year
For the preceding year, had compensation greater than $115,000 from the employer
What is the 50/40 test?
All defined benefit plans require coverage on each day of the plan year for the lesser of 50 employees or 40% or more of all nonexcludable employees.
In addition, defined benefit plans also must meet one of the safe harbor, ratio % or average benfits % test
What is a top heavy plan?
A top heavy plan provides more than 60% of its benefits to key employees. If TH, the plan must provide more rapid vesting than generally required. A top heavy defined benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service up to 20%. A top heavy defined contribution plan must contribute 3% of the total compensation. If the contribution for key employees is less than 3%, the contribution to non-key employees can be equal to the contribution for key employees.
What is a key employee?
An officer with compensation in excess of $165,000
A greater than 5% owner
A greater than 1% owner with compensation greater than $150,000
The number of officers that may be considered key employees is limited to the lesser of 50 employees; or the greater of three employees or 10% of all employees.
When is integration with S.S. permitted?
Defined contribution plans can be integrated with S.S. using only the excess method
What are the requirements for vesting under defined benefit plans?
A five-year cliff vesting –no vesting is required before five years of service; 100% vesting is required after five years of service
3-7 year graduated vesting – the plan must provide vesting that is at least as fast as 3 - 20%, 4-40%, 5-60%, 6-80%, 7-100%
Cash balance plans require three-year cliff vesting
What are the requirements for vesting under a defined contribution plan?
Three year cliff vesting; 100% vested after three years of service
2-6 year graduated vesting
Under what circumstances is an employee automatically 100% vested?
Plan termination
SEP plan, SARSEP plans, and SIMPLE
Attainment of a normal retirement age
Under Section 401(k) plan, elective deferrals, qualified nonelective contributions, and qualified matching contribution are 100% vested at all times.
Safe-harbor contributions to a safe harbor Section 401(k) plan
Plan requires two years of service for eligibility
What are the defined benefit limits?
100% of the participant’s compensation averaged over the three highest consecutive years of compensation
$205,000 (max benefit amount for 2013)
What are the defined contribution limits?
The annual additional limits cannot exceed the lesser of the following;
100% of the participant’s annual compensation
$51,000 (for 2013) – includes everything employer/employee, but not catch-up contributions
What is the compensation limit for qualified plans?
Covered compensation is capped at $255,000 for 2013
Which plans typically have loan provisions?
Section 403(b) and Section 401(k) plans All loans must be repaid in five years and include interest unless to purchase a residence - then the lending period must be reasonable. Loans must be available to everyone. Loans are generally limited to 1/2 PV of accrued benefit or bested account balance and cannot exceed $50,000
What are the disadvantages of a defined benefit plan?
High administrative costs to set-up and maintain.
Employees who leave before retirement may receive little value
Employer assumes risk of investment
Require costly annual actuarial work
What are PBGC Premiums?
Covers plans that terminate without sufficient funds to pay. The premiums are paid by the sponsor of the plan and include a base premium paid by all employers and a variable premium with no overall maximum. The PBGC may not cover all plan benefits and does not cover benefits added to the plan less than five years before a distress termination.
What is a DB(k) plan?
Designed to address the potential shortfalls in Section 401(k) plans and a decline in the establishment of defined benefit plans.
For plan years befinning in the year 2010, a traditional defined benefit plan will be permitted to accept Section 401(k)-type (pre-tax employee contributions.
A Sponsoring employer with no more than 500 employees may offer the DB(k) plan
The 401(k) component must include an automatic enrollment feature and fully vested 50% match on the first 4% of compensation deferred by an employee.
Guarantees monthly income at retirement
Encourages employers without a pension play to establish one
Combines the security employees get through traditional defined benefit plans with the individual investment control
Benefit to employers - exemption from the top-heavy rules, allows small employers to sponsor a defined benefit plan with predictable costs adn lower premiums because of the Section 401(k) matching, minimal reporting requirements
