5 - Overview of Defined Contribution Plan Structure Flashcards
the impact of inflation is much greater on defined _____ plans than on defined ____ plans. explain.
- contribution
- benefit
defined contributions are based on the employee’s career average earnings (not final three- or five- year-average before retirement)
types of plans that exist to promote small employer participation in the private retirement plan system. (3)
- simplified employee pensions (SEPs)
- savings incentive match plans for employees (SIMPLEs)
- Keogh plans
created to invest primarily in employer securities
stock ownership plans
The Internal Revenue Code (IRC) primarily segments qualified defined contribution plans into three major types of plans:
- money purchase pension plans
- profit-sharing plans
- stock ownership plans.
Allowable employers under Section 403(b) include: (4)
- nonprofit organizations qualified under Section 501(c)(3) of the IRC
- public school systems
- public colleges
- public universities.
why is the aggregate amount of employer contributions allocated to younger employees usually much higher under a defined contribution plan than under a defined benefit plan?
is usually expressed as a percentage of the employee’s current pay.
Thus, the amount allocated to younger employees usually is much higher under a defined contribution plan than it is under a defined benefit plan.
Section ____ of the Internal Revenue Code (IRC) permits most qualified plans to “integrate” or coordinate contributions and/or benefits with the benefits provided by Social Security.
401(l)
an arrangement in which each participant maintains an individual account, employer contributions, generally made on an after-tax basis, are either a fixed percentage of pay or a fixed dollar amount.
A money purchase plan
defined contribution-type plans that can be structured with either a discretionary formula or a predetermined formula for employer contributions into the plan. (Although the plans can be based on an employer’s profits, there is no requirement that an employer must actually earn a profit to make contributions.)
Profit-sharing plans
state and municipal governmental employees are prohibited from participating in 401(k) plans. the revenue Act of 1978 made provision for similar tax-deferral opportunities for these workers through the use of nonqualified deferred compensation plans by creating _________
IRC Section 457.
under defined contribution plans, the ______ both receives the benefit of all positive investment returns and bears the risk of all unfavorable results. under a defined benefit plan, investment risk and reward are borne by the _____.
employee
employer
- this provision of the law provides for a limited form of discrimination in that it permits plans to provide higher contributions or benefits for higher paid employees so as to compensate for the fact that the relative value of Social Security decreases as pay goes up.
- the provision that permits the integration of most qualified plans with Social Security benefits
(important)
Section 401(l)
In a defined contribution plan, the level of employer contributions can be higher for employees earning above a specified amount than for those earning below and up to that specified amount. The point at which the contribution percentage changes is called the plan’s integration level and the maximum integration level is the ________. Regulations require that the difference between these two employer contribution levels cannot exceed a certain amount—called the ________
Social Security taxable wage base
permitted disparity.
What are the limits on the annual additions that can be made to a defined contribution employee account?
The maximum annual addition that can be made is limited to the lesser of 100% of compensation or _____ (in 2013) indexed for inflation.
There is also a uniform employer deduction limit of ___ of compensation for all defined contribution plans.
$51,000
25%
Is a money purchase plan subject to plan termination provisions applicable to defined benefit plans?
NO!
