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CHFC HS 326 PLANNING FOR RETIREMENT NEEDS > Chapter 4 Qualified Pension Plans > Flashcards

Chapter 4 Qualified Pension Plans Flashcards

1
Q

Pension Plans

A

DB - Defined Benefit
Cash Balance
DC - Money Purchase
Target Benefit

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2
Q

Profit Sharing Plans - 4SEP

A

DC- Profit Sharing Plan
Stock Bonus Plan
ESOP
401k

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3
Q

Anti-Cutback Rule

A

Plan sponsor can’t amend plans to reduce already accrued benefits. Doesn’t prevent plan from freezing or reducing future benefit accruals

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4
Q

Mandatory Funding

A

Pension plan have mandatory funding requirements

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5
Q

DB Pension Plan mandatory funding

A

Plan sponsor must fund the plan on annual basis with amount within the actuarially calculated range. PPA 2006 changed previous minimum rules

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6
Q

DC Pension Plan mandatory funding

A

Plan sponsor must fund the plan annually with the amount defined in the plan document.

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7
Q

Minimum funding PPA 2006

A

New requirements aimed to have most single employer DB pension plans funded at 100% by 2015

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8
Q

Funding Target

A

100% of the PV of all benefits accrued or earned under the plan as of the beginning of the plan year

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9
Q

Target Normal Cost

A

Value of plan benefits earned by employees during the current year

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10
Q

Shortfall Amortization

A

If ratio of plan assets to benefit obligations is less than 100% then amortize annually over 7 years

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11
Q

If plan assets is less than funding target

A

Minimum contribution is: The sum of target normal cost, any shortfall amortization charge and any waiver amortization charge

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12
Q

If value of plan assets is equal or exceeds the funding target

A

Minimum required contribution is the target normal cost reduced (not below zero) by the excess of the value of plan assets over the funding target

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13
Q

Limited investment in employer securities

A

no more than 10% of plan assets (includes stocks, bonds and partnership interests)

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14
Q

Annuity requirements - pension plans

A

Lifetime annuity payment must always be offered. Married participants must all be offered Qualifed jt & survivor annuity and Qualified pre-retirement survivor annuity

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15
Q

Benefit limits 2023

A

Covered compensation limit $330,000
No employee wage in excess may be used in calculations

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16
Q

Defined benefit limit

A

$265,000
No expected pension benefits at retirement may exceed the lesser of this or 100% of the average compensation over 3 consecutive years

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17
Q

DC plan limit

A

$66,000
Sum of all contribution to a DC pension plan’s separate account may not exceed the lesser of this dollar amount or 100% of employees compensation

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18
Q

Employer contribution limit

A

25%
The employers total annual plan contributions may not exceed this percentage of aggregate employee covered compensation

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19
Q

DB plan forfeitures

A

Must be used to reduce future plan costs

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20
Q

Use of an Actuary

A

DB Pension - require annual estimates of plan funding for DB and Cash Balance
DC Pension - use depends on sub-type. Target Benefit plans required at inception only and MPPP no requirement

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21
Q

Investment Risk

A

DB - risk lies with employer
DC - risk lies with employee

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22
Q

Forfeitures

A

DB - reduce future plan contribution costs for sponsor
DC - reduced future plan contribution costs for sponsor or an allocation to remaining plan participants

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23
Q

Pension Benefits Guaranty Corporation (PBGC)

A

DB - most plans covered by PBGC
DC - no PBGC coverage

24
Q

Accrued benefit and account balance

A

DB - accrued benefit = PV of vested expected future payments at retirement
DC - accrued benefit = vested account balance of plan

25
Q

Actuary assumptions direct relationships

A

Inflations, wage increases, life expectancy
Assumptions go up - plan costs go up

26
Q

Actuary assumptions indirect relationships

A

Investment returns, mortality, forfeiture
Assumptions go up - plan costs go down

27
Q

Credit for prior service

A

DB - allowed
DC - not allowed

28
Q

Social security integration (Permitted Disparity)

A

allows qualified pension plans to adjust by providing higher benefits or contributions to employees with income that exceeds an integration level

29
Q

Integration levels

A

DB - average of 35 years of previous social security wage base amounts - covered compensation is $97,172 in 2023
DC - level is chosen as a single dollar amount no larger than the social security wage base for contribution year - social security wage base is $160,200 in 2023

30
Q

Excess method

A

Provides an excess benefit to those participants whose earnings are in excess of the integration level - both DB and DC

31
Q

Offset Method

A

Reduces the benefit to those employees whose earnings are below the integration level - only DB

32
Q

IRC allowed methods of calculating disparity

A

Excess and Offset

33
Q

Employer contribution limit

A

25%
The employers total annual plan contributions may not exceed this percentage of aggregate employee covered compensation

34
Q

Three methods of calculating ultimate pension benefit

A

Flat amount formula
Flat percentage formula
Unit credit formula

35
Q

Flat amount formula

A

Flat amount per month - no incentive to continue employment after attaining max flat amount

36
Q

Flat percentage amount

A

Flat percentage based on compensation.
Incentive to increase compensation but not to continue employment after attaining desired benefit

37
Q

Unit credit formula

A

Benefit determined on a combination of service and compensation (ex - 2% x years of service x 2 highest consecutive years of pay)
Incentive to attain additional years of service and additional compensation

38
Q

3 benefit accrual methods to prevent back loading abuse

A

3 percent method
133 1/3 percent rule
Fractional rule

39
Q

Cash balance pension plan

A

Must have 3 year cliff vesting
Comingled accounts - each year employee receives a hypothetical account balance with annual contributions and earnings
Provide greater benefits to younger and shorter service employees than traditional DB plans

40
Q

MPPP

A

No actuary
Separate accounts
Plan documents specifies funding formula
Employer contribution risk
Participant investment risk
Favor younger entrants

41
Q

Target Benefit Pension Plan

A

Separate accounts
Employee investment risk
Annual contribution formula designed to create a targeted payout benefit to be achieved at normal retirement age
Requires actuary to perform initial plan design
Older participants receive larger annual contributions

42
Q

Plans benefiting older employees

A

Traditional DB
Target benefit

43
Q

Plans benefiting younger employees

A

Cash balance
MPPP

44
Q

Life insurance allowed in a pension plan

A

Term
Whole life
Universal
benefits must be incidental

45
Q

25% test

A

commonly used for defined contribution plans
used if policy is term or universal life
aggregate premiums cannot exceed 25% of the employers aggregate contributions to account
Whole life cannot exceed 50%
all policies must be converted to cash, an annuity or distributed at fair market value prior to retirement

46
Q

100-to-1 ratio test

A

commonly used with defined benefit pension plans
death benefit may not exceed 100 times the monthly accrued retirement benefit provided under the plan

47
Q

412e3 plan

A

defined benefit pension plan funded entirely by life insurance contract or annuity
typically sole proprietorship with only a few employees
Employer can still claim tax deduction for contributions made to pay premiums

48
Q

Life insurance tax

A

annual premiums paid for term life insurance are considered taxable to participant and create basis in the contract
death proceeds amount received in excess of cash value is not taxed
distribution of life insurance subject to income tax less basis

49
Q

PBGC

A

Per participant fee $96
underfunded plans $52 per participant per $1,000 of underfunding up to $652 cap

50
Q

Plans covered by PBGC

A

Defined benefit
cash balance
pension equity

professional service employers that never have more than 25 employees are not covered (doctors, lawyers, etc)

51
Q

PBGC payout

A

based on payout type (single, joint and 50% survivor), age and funds recovered if plan was underfunded
has an upper limit on underfunded plan payouts that can be less than plan promised
no COLA

52
Q

DB plans favor

A

Older and longer serving employees

53
Q

Small companies pension plan selection

A

DC Pension plans
Cost and administration less burdensome

54
Q

Large companies pension plan selection

A

DB pension plans
Costs spread over a larger number of participants

55
Q
A

CHFC HS 326 PLANNING FOR RETIREMENT NEEDS (10 decks)

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