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Retirement Planning- FIP > UNIT 3- EMPLOYER sponsored Pension Plans > Flashcards

UNIT 3- EMPLOYER sponsored Pension Plans Flashcards

1
Q

Defined CONTRIBUTION RPP’s

A
  • contribution from employer + employee known upfront
  • Retirement BENEFIT not known (at end)
  • at retirement- used to buy Life annuity or trf to LIF
  • also called Money purchase
  • no risk to empployer
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2
Q

Contribution Levels

A
  • employer/employee- 5%
  • employee can choose amt to contribute and employer matches
  • Max COMBINED contribution= 18% earnings + current money purchase contribution limit
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3
Q

Past service contributions

A

??

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4
Q

Projection of Pension Income

A

Pensionable earnings
- contributions based on pensionable earnings
+ contribution rate of employee/employer

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5
Q

Integration w/ CPP/QPP

A

reducing contributions by 3.6 of YMPE

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6
Q

Annual Pension Income

A

capital X rate per $1000

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7
Q

Tax treatment of Defined contribution Plans

A
  • contribution from employer TAX DEDUCTIBLE to EMPLOYER + NOT taxable income to emplpyee
  • EMPLOYEE contributions TAX DEDCUTIBLE to employee
  • Investments earned in fund TAX DEFERRED
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8
Q

Max Contribution to Defined CONTRIBUTION PLAN

A

LESSER OF:

  • 18% X Pensionable earnings
  • Money purchase limit specified

-contributions to DCP reduce RRSP cont. limit

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9
Q

Defined BENEFIT pension Plan

A

any plan that defines AMOUNT of pension BENEFIT payable at retirement

  • if employee contributions required- fixed % of earnings
  • employer MUST contribute enough to ensure pension will be enough at retirement
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10
Q

Types of defined Benefit Plans

A
  1. Career average
  2. Final + best earnings
  3. Flat benefit
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11
Q

DBP- Career average Pension Plan + Formulas

A

-Amt of pension benefit at retirement avg of earnings over career and years of service

[(pensionable earnings X unit %) x years member of plan)]
OR
[(Avg earnings X unit %) X Years member of plan)]

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12
Q

BDP- Final and best earnings + formulas

A

-Final earnings plan: Unit % applied avg final 3-5 yrs
[(avg final earnings X Unit %) X Years of credited Service

-Best earnings plan: Unit % applied to avg of best 3-5 yrs or earlier 3-5 years
[(avg best earnings X unit %) X years of credited service)]

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13
Q

DBP- Flat benefit Pension Plans + Formula

A

-Flat rate Benefit Pension Plan
-available to those w/ min # years service
[(flat rate x yrs of service)]

-reduced proportionally to those w/ less service
[(yrs of service / Req years of service) X Flat Rate

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14
Q

DBP-Contributory plan

A

If employee required to contribute

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15
Q

DBP-contributory earnings

A

earnins subject to pension contribution (not same as income)

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16
Q

DBP-Integrated Pension Plan + formula

A
  • integrates CPP/QPP benefits
  • stepped contributions for those already contributing to CPP/QPP
  • lower rate on earnings below YMPE
  • Higher rate on earnings above YMPE

Cont. rate on amts UP TO YMPE X YMPE
+
Cont. rate on amts ABOVE YMPE X (earnings -YMPE)

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17
Q

DBP-Past Service Contributions

A
  • If plan requires members to have min 5 yrs emp to join plan- may give new member option to buy credits for past service
  • ???
  • ??
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18
Q

DBP-EMPLOYER Contribution Levels

A

Usually fixed % of earnings

  • knows how much to contribute
  • knows how pension entitlement will be calculated at retirement

-employer MUST contribute enough to ensure will be enough pension at retirement

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19
Q

Tax treatment of contributions

A

contributins MAY be deducted when calculating Taxable income of Contributor

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20
Q

Max Pension Benefits

A

??

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21
Q

Comparion of DCP and DBP

A

–LATER

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22
Q

DBP- unreduced early retirement pension

A
  • may be eligible if within 10 years of NRA and either:
    1. age + yrs of qualifying service (qualifying factor) at least 90 for NRA and 85 for NRA 60
    OR
    2. Have at least 30 years of qualifying service
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23
Q

unreduced early retirement calculation

A

(age joined plan + QF) / 2

or?
unreduced early retirement age - current age

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24
Q

Qualifying factor calculation

A

Age + qualifying years of service

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25
Q

Locked in

A

if terminated- can’t refund of contributions

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26
Q

Pensionable earnings

A

earnings that are eligible for inclusion in determining annual pension income at retirement

  • not incl: bonuses, OT, taxable benefits
  • not same as earned income
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27
Q

DBP Age at which pensions start

A

current age + projected additional years of service

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28
Q

Years of service expected at retirement

A

Current yrs service + Projected additional years of service

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29
Q

Indexation of annual Pension Income

A
  • % of CPI

CPI X indexation rate

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30
Q

Years Max Pensionable Earnings (YMPE)

A
  • YMPE is what CPP/QPP based on
  • determines max annual contribution to CPP/QPP
  • used to determine Pension Benefits in DBP
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31
Q

DBP Percentage of pensionable Earnings for years of service

A

-used to determoine size of pension benefit at retirement

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32
Q

Average Final pensionable Earnings

A

-pensionable earnings for last years of employment OR Earnings over # years specified in # yrs avg for final pensionable earnings

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33
Q

Average Pensionable Earnings formula

A

yr1 + yr2 + yr3 + yr4 + yr5 / 5yrs

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34
Q

Annual Pension Income at retirement

A

Step 1: Amount for earnings UNDER YMPE:
% of pensionable earnings UNDER YMPE X Pensionable earnings at retirement up to the avg YMPE

Step 2: Amount of earnings ABOVE YMPE:
Specified % of pensionable earnings ABOVE YMPE X
(Pensionable earnings at retirement - Avg YMPE at retirement)

ADD STEP 1 AND STEP 2, THEN:

STEP 3: annual Pension Income:
( TOTAL step 1 +2)
X years of service

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35
Q

Annual pension income at retirement

A

??

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36
Q

Individual Pension Plan (IPP)

A
  • EMPLOYER sponsored Defined Benefit Registered Pension Plan

- referred to as RRSP upgrade b/c tax reductions and higher pension benefits

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37
Q

IPP specified Individuals

A

-significant connected individuals- s/h with minimum 10% shares, and not at arms length with employer
OR
- Other highly paid employees (more than 2.5x YMPE)

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38
Q

Suitability of IPP’s- good for:

A
  • owner/manager, executive of incorporated biz, a professional not allowed to incorporate ?
  • steady income
  • min age between 40-45 (b/c less time to accumulate funds to reach retirement income)
  • earnings $100,000 or more
  • Max RRSP each year
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39
Q

IPP pension benefits

A
  • IPP is defined benefit plan
    -KNOWN level of income at retirement
    -based on career avg earninings
    -
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40
Q

IPP Contribution levels

A

contributions based on :

  • age
  • employment earnings
  • actuarial valuation reports
41
Q

IPP contribution Level formulas (2)

A

Pensionable Earnings [(LESSER OF (dollar limit for this year / benefit rate) and salary

Maximum Benefit [(Pensionable earning X Maximum benefit rate)]

42
Q

IPP cont level formula- Pensionable earnings

A

[(LESSER OF (dollar limit for this year / benefit rate) and salary

43
Q

IPP cont level formula- Maximum Benefit

A

[(Pensionable earning X Maximum benefit rate)]

44
Q

50% rule

A

if employee contributes , contrinutions muct be less than 50% accrued benefits

45
Q

IPP Past service Contributions

A
  • can make past service contributions to IPP for past service that predates setup of IPP
  • Funded over MAX period of 15 years
46
Q

Tax treatment

A

IPP defers tax

  • Eligible contributions tax deductible
  • tax deferred growth
  • no deemed disposition of asset on death of member
  • eligible expenses tax deductible when paid b company sponsoring IPP
47
Q

Advantages of IPP

A

-potential significant tax relief and tax deductions
-forced savings
fund assets protected by creditors
-guaranteed level retirement income
-indexing of pension benefits
-can be tailored to meet individual needs
-preservation of IPP assets on death

48
Q

Disadvantages of IPP

A
  • Expensive admin
  • cannot access funds
  • mandatory Contributions
  • cannot make spousal contribution
49
Q

IPP Tax Advantages

A
  • may allow individual larger tax deductible contributions

- larger contribution = larger tax derral = higher pension fund = higher pension at retirement

50
Q

IPP Forced savings advantage

A
  • prescribed contributions MUST be made every eyar if plan registered provincially
  • IPP will impact RRSP contributions room in year established and afterwards
51
Q

IPP protection from creditors

A
  • b/c registered pension plan–> creditor proof.
  • mitigates risk of losing assets
  • some exceptions to protection
52
Q

IPP Guaranteed Level of Retirement Income

A

-B/C IPP is defined benefit plan- guarantees set level of retirement income upfront

53
Q

IPP Indexing of pension benefits

A

-requires larger contributions, but still tax deductible

54
Q

IPP reduced payroll tax

A

-money employer contributes to IPP of remployee not subject to payroll tax

55
Q

IPP tailored to individual needs

A
  • flexible retirement dates, distribution options of plan assets, level of pensions
56
Q

IPP Administration -disadvantage

A
  • more complicated and costly to set up

- fees for IPP tax deductible of paid directly by corporation

57
Q

Terminal funding

A

right before retirement starts- may be able to make significant lump sum pmt

58
Q

Retirement Compensation arrangements (RCA’s)

A

way for employers to provide adequate retirement benefits to employees

How they work

  • employer/employee make tax deductible contribtions to custodian (trustee for RCS)
  • Custodian holds the funds ina trust till paid to employee (beneficiary of trust)
  • money divided equally into RCS investment account and RCA refundable tax account
59
Q

RCA contributions

A
  • no set limit on how much employer can contribute to RCA
  • actuary wil determine contribution amt based on what is req to give employee reasonable pension based on % of average income
60
Q

RCA funding

A

employer contributes using:

  • funds accumulated in R/E
  • O/S bonuses owed to key employees
  • financiang from bank
  • Life ins policy
61
Q

RCA investments

A

no investment rules for RCA

62
Q

RCA suitability

A
  • for owners/managers, executives, key employees with significant income
  • employees who are non residents when retire
  • employers who want to attract/reward/retain key employees
63
Q

RCA distribution of benefits

A

Benefits paid by custodian when:

  • employee retires
  • severance from employment
  • substantial change in services employee provides- while still working for employer
  • taxed when retirement income rec’d
64
Q

Advantages of RCA’S

A

-Higher contribution Limits- significantly higher than RRSP, IPP, RPP + doesn’t affect RRSP contributions

  • Tax benefits- contributions 100% tax deductible + not subject to payroll tax
  • benefits not taxable till paid

Security of funds: held in trust- guarantees funds at retirement + protected fro creditors

  • Attractive to prospective employees- way for employers to attract/retain talented employees
  • flexibility of investments- not restricted
65
Q

Disadvantages of RCA’s

A

-refundable tax acct of RVA held by CRA doesn’t pay interest

66
Q

Profit Sharing Plans

A
  • a defined contribution plan
  • minimum 1% contribution even if no profit
  • not a registered plan
67
Q

Contribution levels

A
  • amount of employer contribution directly related to profits
  • minimum contribution $1 of salary even if no profit
  • minimum employer contribution 1% of combined payroll of plan members
68
Q

Allocation of Benefits

A

-based on points system

Total points = points for earnings + points for service

allocation= employee points / total points X (Profit or employer profit)

69
Q

Tax treatment

A
  • employers contributions tax deductible to employer
  • employee contribution tax deductible
  • benefits taxable when recd
70
Q

Mas contribution levels

A
  • combined contribution of employer + employee must not exceed money purchase limit if will be tax deductible
  • contributions reduce amount to RRSP
71
Q

Distribution Options

A
  • Distribution Upon termination PRIOR to retirement

- Distribution at DEATH (before, after early retirement, after retirement

72
Q

Distribution upon termination PRIOR to retirement

A
  • if employee quits BEFORE end of vesting- may receive full refund of contributions + interest in cash (not incl employer cont)
  • If employee quits AFTER vesting- contributions (incl employer) locked in- employee gets both portions
  • funds must be used to provide retirement income (Deferred lifetime annuity)
73
Q

Distribution at death

A

-Death before retirement:

preretirement DB = value of vested termination benefits accrued after 1986 till death

74
Q

distribution before early retirement

A

-death more than 10yrs before EARLY retirement age:
surviving spouse can receive deferred ann.
or
spouse may trf commuted value to
1. own RPP plan
2.LIRA
3. Financial inst to buy annuity- tax consequences ?

75
Q

death after early retirement age

A

Death WITHIN 10 yrs of early retirement age:
deemed to have been eligible for early retirement pension
-spouse gets 60% reduced early retirement pension earned + refund of employee cont. + interest
-no spouse: DB to beneficiary of estate (employees contrbutions + interest)

76
Q

Death after retirement

A
  • Straight life annuity
  • Refund ann.
  • ann. with guaranteed period
  • joint/last survivor ann.
  • variable ann
  • Cash options
77
Q

Straight Life annuities

A
  • non contributory plan

- normal pension in form of straight life ann.

78
Q

Refund annuities

A

-Contributory
-ensures employees get back value of contributions
-death before pension rec’d:
~least= employee cont. + interest
~balance in lump sum to beneficiary

79
Q

Annuities with guaranteed period

A
  • pension payable for life

- pmts guaranteed to continue min number of years- even if death occurs before end of guarantee period

80
Q

Joint/last survivor annuity

A
  • monthly benefit usually reduced compared to straight life annuities
  • provides assurance that both will get retirement income for life
81
Q

Variable annuities and cost of living supplements

A

-??

82
Q

Cash Options

A

pension cannot be commuted to cash at retirement- b/c must be used to provide retirement income

83
Q

3 Types of RPP

A
  1. Normal plans
  2. Notched Plans
  3. Bridged Plans
84
Q
  1. Normal Pension benefits
A

-if retire before age 65, will see a jump in income when reach age 65 due to QPP and OAS

85
Q
  1. Notched Pension benefits
A
  • retire before age 65- get higher than normal pension pmts in bgn
  • pmts reduced once turn 65 and government benefits kick in
  • provides level income
86
Q
  1. Bridged Plans
A
  • bridging supplement equivalent to anticipated government benefits provided by plan prior to age 65 + normal level benefits
  • additional benefit= additional cost to employer
87
Q

Retirement due to disability

A
  • full credit given to pensioners up to date of retirement without reductions
  • cost assumed by pension plan
  • if already receiving disability pmts frolong term disability- can defer credits til NRA
88
Q

RULES AND REGULATIONS

A

??

89
Q

Documentation

A
  • Plan text
  • trust agreement for trusteed plans
  • Insurance contract for insured plan
  • non technical explanatory materials
90
Q

eligibility

A
  • employer not req to set up pension Plan
    -if employer does-
    ~ all FT emp. can join plan after 2 yrs continuous service
    ~part time employee- join after 2 yrs service at least 75% YMPE OR 700hrs service each yr for 2 yrs

no min/max age for joining plan

91
Q

Vesting

A

point in time when RPP contributions made by employer become property of employee
-employee can receive benefit of contributions even if no longer works there

92
Q

Locking In

A

after period of time as member of pla, employee and employer contributions locked in
-meaning contributions cannot be taken as lump sum, must be used to provide retirement income

93
Q

Exceptions to Locking in rule

A

??? later

94
Q

Portability

A

ability to trf pension credits to another pension plan or to Locked in RRSP when employee changes job

95
Q

Minimum employer contributions

A

employer must contribute min 50% of cost of pension benefits accrued by employee after qualification date
-exemption: DBP that province indexing of benefits at rate equivalent to 75%

96
Q

Survivors benefits

A

beneficiaries receive minimum refund of contributions made by member if they die

97
Q

POST retirement deaths

A

all jurisdictions in Canada req retirement pensions paid as joint and last survivor annuity if had spouse
-benefit to surviving spouse reduced by 60% of initial pension

98
Q

PRE retirement Death

A
  • benefits vary

- depends on whether member was within early retirement age as well as marital status

Retirement Planning- FIP (5 decks)

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