Retirement: 2 Planning for Retirement, SS, and Defined Benefit Plans Flashcards Preview

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Flashcards in Retirement: 2 Planning for Retirement, SS, and Defined Benefit Plans Deck (102)
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1

Retirement: 2-1 Defined Benefit Pensions

The GRF Corporation’s traditional defined benefit plan provides a benefit that entitles Evelyn James to an annual pension of 100% of her final average pay at age 65. Her salary is $225,000; a 100% benefit would amount to $225,000. However, the plan may fund a benefit for her of only $_____ in 2016

a. $100,000

b. $210,000

c. $225,000

d. $450,000

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b. $210,000

However, the plan may fund a benefit for her of only $210,000 in 2016—the lesser of $210,000 or $225,000.

As a rule, a participant’s annual benefit cannot exceed the lesser of $210,000 (as indexed in 2016) or 100% of annual compensation. This is the IRC Section 415(b) limit.

2

Retirement: 2-1 Defined Benefit Pensions

Jonathan works for Mixed Nuts Corporation and his current salary is $35,000. The maximum annual pension benefit for him allowed under Section 415(b) would be:

a. $35,000

b. $70,000

c. $100,000

d. $210,000

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a. $35,000

The lesser of $210,000 or 100% of compensation. In this case, 100% of compensation is the lower number.

As a rule, a participant’s annual benefit cannot exceed the lesser of $210,000 (as indexed in 2016) or 100% of annual compensation. This is the IRC Section 415(b) limit.

3

Retirement: 2-1 Defined Benefit Pensions

The plan provides security for employees in the form of a specified benefit and also is backed by the:

a. The Federal Government

b. FDIC

c. ERISA

d. Pension Benefit Guaranty Corporation (PBGC)

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d. Pension Benefit Guaranty Corporation (PBGC)

4

Retirement: 2-1 Defined Benefit Pensions

Generally the “crossover” range, in which a traditional defined benefit plan can become more attractive than a defined contribution plan is between ages:

a. 35 to 40

b. 45 to 50

c. 45 to 55

d. 50 to 60

2-1

b. 45 to 50

5

Retirement: 2-1 Defined Benefit Pensions

The retirement benefits provided by a defined benefit plan are governed by three determinants. Which is NOT one of them?

a. the benefit formula

b. the participant’s compensation

c. the prevailing interest rates at retirement

d. the participant’s years of service or participation

2-1

c. the prevailing interest rates at retirement

6

Retirement: 2-1 Defined Benefit Pensions

In virtually all plans, normal retirement age will also include a service factor. A common example is:

a. the later of age 65 or completion of five years of service

b. the later of age 62 or completion of five years of service

c. the later of age 60 or completion of five years of service

d. the later of age 65 or completion of ten years of service

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a. the later of age 65 or completion of five years of service

7

Retirement: 2-1 Defined Benefit Pensions

Compensation is the individual’s total earnings, as defined in the plan document. Such definition must be nondiscriminatory, which means it must satisfy sections _____ of the Internal Revenue Code.

a. 404(s) and 455(c)(3)

b. 444(s) and 415(c)(3)

c. 414(s) and 455(c)(3)

d. 414(s) and 415(c)(3)

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d. 414(s) and 415(c)(3)

8

Retirement: 2-1 Defined Benefit Pensions

The definition of total earnings will satisfy safe harbor provisions if it includes all compensation within the meaning of _____ and excludes all other compensation. For our purposes, wages, salaries, fees for service, and any item included in income meet this definition requirement.

a. Section 415

b. Section 315(c)(3)

c. Section 415(c)(3)

d. Section 515(c)(3)

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c. Section 415(c)(3)

9

Retirement: 2-1 Defined Benefit Pensions

Jane works for ABC Corporation and is a participant in their defined benefit plan. The plan’s definition of compensation excludes bonuses. She earns $50,000 per year, and will receive a Christmas bonus of $3,000. In calculating her retirement benefit ABC will take into account:

a. her $50,000 of wages and her $3,000 bonus.

b. her $50,000 of wages, but not her $3,000 bonus.

2-1

b. her $50,000 of wages, but not her $3,000 bonus.

10

Retirement: 2-1 Defined Benefit Pensions

Compensation, or “pay,” will be defined in the plan document as either one of two ways: _____ is the highest three or five years of compensation prior to a participant’s retirement

a. final average pay

b. career average pay.

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a. final average pay

11

Retirement: 2-1 Defined Benefit Pensions

Compensation, or “pay,” will be defined in the plan document as either one of two ways: _____ is the average compensation for all years of service

a. final average pay

b. career average pay.

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b. career average pay.

12

Retirement: 2-1 Defined Benefit Pensions

Compensation, or “pay,” will be defined in the plan document as either final average pay, or career average pay. For most employees, this option will be a more favorable provision:

a. final average pay

b. career average pay.

2-1

a. final average pay

13

Retirement: 2-1 Defined Benefit Pensions

The definition of compensation must also meet the requirements of IRC Section 401(a)(17), which imposes an annual limit on the amount of compensation that
can be considered in calculating a qualified plan contribution or benefit. This limit is _____ in 2016.

a. $118,500

b. $210,000

c. $265,000

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c. $265,000

14

Retirement: 2-1 Defined Benefit Pensions

John Salzur has received $305,000 per year in W-2 compensation for the past four years and participates in his employer’s defined benefit plan. The plan provides a flat percentage benefit of 36.25% of compensation, defined as the average final three years of compensation. Because John’s salary has been above the compensation limit for the past three years, his benefit under the defined benefit plan will be 36.25% of the compensation limit. In 2016, his employer can only fund for a benefit of:

a. $210,000

b. $110,562.50

c. $265,000

d. $96,062.50

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d. $96,062.50

In 2016, his employer can only fund for a benefit of $96,062.50 per year at retirement, which is 36.25% of $265,000. His benefit cannot be 36.25% of his full amount of $305,000 of compensation; it is calculated only on amounts up to $265,000.

15

Retirement: 2-1 Defined Benefit Pensions

A defined benefit plan is required to define the age at which full benefits will commence. This is known as:

a. Normal retirement age

b. Full retirement age

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a. Normal retirement age

Normal retirement age is used as the target age in plan funding calculations. It has little to do with when an employee will actually retire or when benefit accruals under the plan will cease. Benefit accruals will not cease (assuming the employee has not attained the maximum benefit provided by the plan) until the employee retires. Since an employee may continue to work beyond the normal retirement age, the employee may continue to earn accruals under the plan.

16

Retirement: 2-1 Defined Benefit Pensions

Early retirement. A typical requirement for plans that do allow early retirement is that employees have at least __ years of service or participation in the plan, and be at least age 55 to be eligible for early retirement.

a. 5

b. 10

c. 15

d. 20

2-1

b. 10

17

Retirement: 2-1 Defined Benefit Pensions

Late retirement. If a worker retires after age 65 or delays taking retirement benefits past age 65, then the IRC Section 415(b)(2)(A) dollar limit on benefits ($210,000 for 2016) _____ be actuarially adjusted upward.

a. must

b. cannot

c. may

2-1

a. must

This is similar to Social Security, in which benefits are reduced if a worker starts taking those benefits before full retirement age (FRA); but if the worker waits until after FRA to start taking benefits, then his or her benefit is increased.

Example. Bob, age 55, has been a teacher for 30 years, and the defined benefit plan for his school district accrues a benefit of 2% of compensation for every year of service up to a maximum of 30 years. This means that Bob has reached a maximum benefit of 60% of compensation, which he could start taking now if he were to retire. If Bob continues to work for another year he will still be receiving 60% of compensation as his annual retirement benefit, not 62%. However, assuming Bob gets a raise each year, it would now be 60% of a slightly larger amount, since the plan takes the highest three years of compensation when calculating the benefit.

18

Retirement: 2-1 Defined Benefit Pensions

Benefit Formulas. Generally, there are two types of formulas used. _____ considers years of service.

a. unit benefit or unit credit formula

b. flat benefit formula

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a. unit benefit or unit credit formula

19

Retirement: 2-1 Defined Benefit Pensions

Benefit Formulas. Generally, there are two types of formulas used. _____ provides a benefit regardless of length of service.

a. unit benefit or unit credit formula

b. flat benefit formula

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b. flat benefit formula

20

Retirement: 2-1 Defined Benefit Pensions

Example. Roberta will retire at the end of the year. The defined benefit plan used by her employer bases the annual benefit on a percentage of average annual pay
during the three years prior to retirement. Roberta’s pay during the final three years of her employment was $48,000, $49,000, and $50,000, respectively. According to the plan, she will receive an annual benefit equal to 40% of her final average annual
pay, or:

a. $18,600

b. $19,600

c. $20,600

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b. $19,600

The average of these—her final average annual pay—is $49,000.

$48,000
$49,000
$50,000
= $147,000
/ 3
= $49,000
* 40%
= $19,600

21

Retirement: 2-1 Defined Benefit Pensions

Because a flat percentage formula fails to consider an employee’s length of service, it fails to meet the needs of companies that insist their plans reflect a sense of equity or

a. fairness

b. unearned entitlement

c. earned entitlement

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c. “earned entitlement.”

22

Retirement: 2-1 Defined Benefit Pensions

Example. As a retiring employee of Alpha Omega Limited, Fred is slated to receive 3% of his final five-year average salary for every year he was employed by Alpha Omega. Since Fred’s average salary during those last five years was $70,000 and he put in 23 years of service, his annual retirement benefit is
calculated as:

a. $47,300

b. $48,300

c. $49,300

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b. $48,300

$70,000
* 3%
* 23
= $48,300

23

Retirement: 2-1 Defined Benefit Pensions

If the plan participant is married, the plan must provide a _____, which continues to pay benefits as long as either the retiree or the spouse continues to live. In effect, it is a life annuity that considers two lives. In most cases, the payment to the survivor is 50% of the joint annuity,

a. qualified joint and survivor annuity (QJSA)

b. qualified optional survivor annuity (QOSA)

c. qualified preretirement annuity (QPSA)

2-1

a. qualified joint and survivor annuity (QJSA),

24

Retirement: 2-1 Defined Benefit Pensions

If the plan participant is married, the plan must provide a life annuity that considers two lives. In most cases, the payment to the survivor is 50% of the joint annuity, but a survivor annuity of 75% must also be offered (called a _____) as required by the Pension Protection Act.

a. qualified joint and survivor annuity (QJSA)

b. qualified optional survivor annuity (QOSA)

c. qualified preretirement annuity (QPSA)

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b. qualified optional survivor annuity (QOSA)

25

Retirement: 2-1 Defined Benefit Pensions

If the plan participant is married, the plan must provide a _____, which provides benefits to the surviving spouse in case the participant dies before the annuity starting date.

a. qualified joint and survivor annuity (QJSA)

b. qualified optional survivor annuity (QOSA)

c. qualified preretirement annuity (QPSA)

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c. qualified preretirement annuity (QPSA).

26

Retirement: 2-1 Defined Benefit Pensions

In addition to offering annuities, defined benefit plans _____ required, to offer a lump-sum alternative.

a. are

b. are not

2-1

b. are not

27

Retirement: 2-1 Defined Benefit Pensions

If a participant leaves the company with less than _____ in vested benefits, a plan usually will pay out the benefit in a single lump sum. The cost of keeping these low balance participants on the rolls is just too high relative to the value of their benefits.

a. $1,000

b. $2,000

c. $5,000

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c. $5,000

28

Retirement: 2-1 Defined Benefit Pensions

Another option available is one for a fixed period. This provides regular monthly payments over a specified period. Even if the recipient (and spouse) happens to die during the specified period this option ensures payments to a named beneficiary.

True or False

2-1

True

29

Retirement: 2-1 Defined Benefit Pensions

The _____ formula relates the retirement benefit to each participant’s level of compensation. For example, the plan may specify that it will pay an annual retirement benefit equal to 35% of the participant’s annual final compensation (or the average compensation for the final three years).

a. flat amount formula

b. flat percentage formula

c. unit benefit formula

2-1

b. flat percentage formula

30

Retirement: 2-1 Defined Benefit Pensions

The _____ formula promises each plan participant an annual flat dollar amount for each year of service; for example, $100 for each year of service to the company.

a. flat amount formula

b. flat percentage formula

c. unit benefit formula

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a. flat amount formula