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HS326 Planning For Retirement Income > Chapter 4: Qualified Pension Plans > Flashcards

Chapter 4: Qualified Pension Plans Flashcards

1
Q

The Covered Compensation limit for Qualified Plans

A

$330,000

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2
Q

Defined Benefit Maximum Limit

A

$265,000

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3
Q

Defined Contribution Maximum Limit

A

$66,000

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4
Q

401(k), SARSEP, 457, 403(B)

A

$22,500

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5
Q

PBGC Monthly Benefit at age 65

A

$6,750

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6
Q

PBGC Yearly Benefit at age 65

A

$81,000

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7
Q

What are the 4 Pension Plan Requirements?

A
  1. Mandatory Annual Funding
  2. Disallow Most In-Service Withdrawals
  3. Limited investment in employer securities
  4. Limited investment in life insurance.
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8
Q

The Anti Cut-Back Rule

A

ERISA rule prohibiting plan sponsor from amending the pension plan to reduce already accrued benefits.

NOTE: Pension plans can be amended to reduce future benefits, but not currently already accrued benefits.

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9
Q

What is a defined benefit plan?

A

At plan that focuses on the benefit payable to participants during retirement.

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10
Q

How is the Minimum Required Contribution for a Pension Plan calculated if the value of plan assets is LESS THAN the funding target?

A

If the value of the pension plan assets is less than the funding target then the minimum required contribution is determined by adding
The target normal cost
+
Any shortfall amortization charge
+
any waiver of amortization charge.

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11
Q

How is the Minimum Required Contribution for a Pension Plan calculated if the value of plan assets EQUALS OR EXCEEDS the funding target?

A

The Target Normal Cost - the excess of
1) the value of plan assets, over 2) the funding target

(The target normal cost cannot be reduced below zero)

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12
Q

what is pension smoothing?

A

to address the issue of large swings in the present value of future pension benefits due to small changes in interest rates, congress uses pension smoothing by tying the discount rates to 25year interest rate averages.

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13
Q

The 2 tests to determine if a Pension is an “At-Risk Plan”

A
  1. a plan is at-risk unless the funding target attainment percentage for the preceding plan year is at least 80%.
  2. a plan is at-risk unless the funding target attainment percentage for the preceding plan year is at least 70%.

EXCEPTION: plans with less than 500 people are not treated as in at-risk status.

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14
Q

What are the two kinds of defined contribution pension plans?

A
  1. Money Purchase pension plans and
  2. Target Benefit pension plans
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15
Q

What is the limitation for employer-based securities invested into pension plans?

A

the asserts of a pension plan may be invested in the securities of the employer provided the aggregate value of employer securities does not exceed 10% of the fair market value of the pension plan assets.

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16
Q

What are the two tests that a qualified plan must pass, when the qualified plan includes life insurance?

A
  1. the 25 Percent test
    or
  2. the 100-1 ratio test
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17
Q

What is the 25 percent test?

A

THERE ARE TWO TESTS THAT MAKE UP THE 25 PERCENT TEST RULE:

  1. If term insurance or Universal Life insurance is purchased within the qualified plan, the aggregate premiums paid for the life insurance policy cannot exceed 25% of the employers aggregate contributions to the participant’s account.
  2. If a whole life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the WL cannot exceed 50% of the employers aggregate contributions to the participant’s account.
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18
Q

how are distributions from qualified plans taxed?

A

As ordinary income

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19
Q

when life insurance is purchased in a qualified pension plan, how are the premiums paid treated?

A

Premiums paid for life insurance in a qualified plan are deemed to be a distribution. Therefore the distribution taxed as ordinary income, BUT the premiums paid are considered basis in the life insurance contract, thus reducing the overall taxable amount.

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20
Q

who is the typical candidate for a 412(e) plan?

A

Sole proprietor with one or a few employees.

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21
Q

how is a 412(e) plan funded?

A

entirely by a life insurance contract or an annuity. The life or annuity premiums paid are claimed as a tax deduction to the employer.

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22
Q

What does PBGC stand for?

A

Pension Benefit Guaranty Corporation

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23
Q

which pension plan types use an actuary?

A

Defined Benefit and Cash Balance pension plans require the use of an annual actuary. The Target Benefit Pension plan uses an actuary only at the inception of the plan.

24
Q

what is the participant promised in a defined contribution plan?

A

in a defined contribution plan, the participant is entitled to the value of the defined contribution plan account balance at retirement (including any investment gains or losses.)

25
Q

What is the participant promised in a defined benefit plan?

A

in a defined benefit plan, the participant is entitled to the promised defined benefit at retirement, regardless of the actual investment performance.

26
Q

Who holds the burden of investment risk in a Defined Benefit & Cash Balance Plan?

A

The Employer

27
Q

Who holds the burden of investment risk in a Target Benefit and Money Purchase plan?

A

The Employee

28
Q

in a defined benefit pension plan, if the fair market value falls below the required mandatory funding and the employer need to contribute additional funds to make up the short fall, how will the deficit generally be amortized?

A

The deficit will generally be amortized over a period not to exceed 15 years.

29
Q

In a defined benefit pension plan, how can Forfeited funds be used?

A

in a defined benefit pension plan Forfeited funds can only be used to reduce future lan funding costs of the employer.

30
Q

In a defined contribution pension plan, how can forfeited funds be used?

A

in a defined contribution pension plan, Forfeited funds can either reduce future plan funding costs or can be allocated to other remaining participants in a nondiscriminatory manner (subject to the maximum annual contribution limit).

31
Q

which types of pension plans include PBGC insurance?

A

Defined Benefit and Cash Balance Pension Plans

32
Q

Which types of pension plans do NOT include PBGC insurance?

A

Target Benefit and Money Purchase Pension Plans

33
Q

Which types of pension plans can grant credit for prior service?

A

Defined benefit plan

34
Q

which types of pension plans can not grant credit for prior service?

A

Defined contributions plans

35
Q

What is Permitted Disparity also known as?

A

Social Security Integration

36
Q

What is Permitted Disparity?

A

A method of allocating contributions or benefits to employees, that provides higher contributions to those employees whose compensation is in excess of the social security wage base for the plan year. It allows the consideration of social security benefits that will be provided to plan participants in the calculation of the participant’s accrual of benefit or contribution amount.

37
Q

what are the two methods for Permitted Disparity?

A

The offset method and the excess method.

38
Q

Which methods of Permitted Disparity are allowed for Defined Benefit Plans?

A

Both - the offset method or the excess method.

39
Q

Which methods of Permitted Disparity are allowed for Defined Contribution Plans?

A

Only the excess method is allowed.

40
Q

what does the excess method provide?

A

it provides an increased percentage benefit (excess benefit) to plan participants whose earnings are in excess of the average of the social security wage bases over the 35year period prior to the individuals social security retirement age.

41
Q

How are account balances held in a Defined Benefit & Cash Balance Pension Plan?

A

Commingled

42
Q

How are account balances held in a Target Benefit and Money Purchase (and all other defined contribution plans?)

A

Separate

43
Q

How many years does it take in a defined benefit pension plan for an employee to received the maximum benefit?

A

at least 10 years

44
Q

If an employee has less than 10 years in a defined benefit pension plan how is the maximum benefit determined?

A

By multiplying $265,000 (2023 maximum benefit) by the employee’s number of years of participation divided by 10.

Defined Benefit Pension Plan Maximum benefit formula for less than 10 years of participation =
$265,000 * N / 10

45
Q

Which defined benefit pension plan pays participants an equal dollar amount at retirement?

A

A defined benefit pension plan that calculates benefits under the Flat Amount Formula

46
Q

Advantage of the Flat Amount Formula for calculating benefits under a defined benefit pension plans.

A

Protects the employer from having to provide increased benefits as salaries increase.

47
Q

Disadvantage of the Flat Amount Formula for calculating benefits under a defined benefit pension plans.

A

highly-paid employees unlikely to choose a flat amount formula for calculating benefits

No incentive for participants to continue employment after attaining maximum flat amount.

48
Q

The Flat Percentage Formula

A

Provides all participants with a benefit equal to a specific percentage of their salary. Usually their final salary or an average of highest earned years.

49
Q

The Unit Credit Forumla

A

Utilizes both a participant’s years of service and salary to determine the accrued benefit.

50
Q

Advantage of the Unit Credit Formula for calculating benefits under a defined benefit pension plans.

A

more likely to retain employees than the flat amount formula or the flat percentage formula.

Incentivizes participants to attain additional years of service to increase overall benefit.

51
Q

Unit Formula calculation

A

Unit *
Years of Service *
Average of 3 highest consecutive annual salaries

52
Q

Advantage of the Flat Percentage Formula for calculating benefits under a defined benefit pension plans.

A

provides for an increasing benefit, based on increased salary.

53
Q

Black Loading

A

the practice of delaying the accrual of benefits until late in someone’s career so that if they were to leave the company they would forfeit all or a large portion of their benefits.

54
Q

what are the three permitted benefit accrual methods

A
  1. 3 percent method
  2. 133 1/3 percent rule
  3. Fractional Rule
55
Q

3 percent method

A

if a participant leaves employment they should receive a benefit that is at least 3% per year * the full benefit assuming that the participant entered the plan at the earliest point and left at a normal point.

HS326 Planning For Retirement Income (9 decks)

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