Retirement: 3 Fundamentals of Defined Contribution Plans Flashcards Preview

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Flashcards in Retirement: 3 Fundamentals of Defined Contribution Plans Deck (113)
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1

Retirement 3-1: Basic characteristics of defined contribution plans

Annual Contribution Limit

Amount necessary to fund a benefit of no more than $210,000 per year in 2016

a. Defined Benefit

b. Defined Contribution

3-1

a. Defined Benefit

2

Retirement 3-1: Basic characteristics of defined contribution plans

Annual Contribution Limit

25% of covered compensation

a. Defined Benefit

b. Defined Contribution

3-1

b. Defined Contribution

3

Retirement 3-1: Basic characteristics of defined contribution plans

How are forfeitures handled?

Must be used to reduce the employer’s contribution

a. Defined Benefit

b. Defined Contribution

3-1

a. Defined Benefit

4

Retirement 3-1: Basic characteristics of defined contribution plans

How are forfeitures handled?

Typically reallocated to other participants, or can be used to reduce the employer’s contribution

a. Defined Benefit

b. Defined Contribution

3-1

b. Defined Contribution

5

Retirement 3-1: Basic characteristics of defined contribution plans

Who assumes the risk?

The employer

a. Defined Benefit

b. Defined Contribution

3-1

a. Defined Benefit

6

Retirement 3-1: Basic characteristics of defined contribution plans

Who assumes the risk?

The employee

a. Defined Benefit

b. Defined Contribution

3-1

b. Defined Contribution

7

Retirement 3-1: Basic characteristics of defined contribution plans

Covered by PBGC?

Yes (except professional firms with less than 25 employees)

a. Defined Benefit

b. Defined Contribution

3-1

a. Defined Benefit

8

Retirement 3-1: Basic characteristics of defined contribution plans

Covered by PBGC?

No

a. Defined Benefit

b. Defined Contribution

3-1

b. Defined Contribution

9

Retirement 3-1: Basic characteristics of defined contribution plans

Separate accounts?

No, commingled

a. Defined Benefit

b. Defined Contribution

3-1

a. Defined Benefit

10

Retirement 3-1: Basic characteristics of defined contribution plans

Separate accounts?

Yes

a. Defined Benefit

b. Defined Contribution

3-1

b. Defined Contribution

11

Retirement 3-1: Basic characteristics of defined contribution plans

Employer’s contribution to the plan

a. Specified by formula in plan documents; typically a percentage of compensation

b. Not Specified by formula in plan documents; typically a percentage of compensation

3-1

a. Specified by formula in plan documents; typically a percentage of compensation

12

Retirement 3-1: Basic characteristics of defined contribution plans

Amount of retirement benefit

a. Certain

b. Uncertain

3-1

b. Uncertain: depends on factors such as investment earnings or losses, expenses, amounts contributed, and forfeitures

13

Retirement 3-1: Basic characteristics of defined contribution plans

Annual additions: Employer and employee contributions and forfeitures applied to a participant’s account may not exceed the lesser of 100% of plan compensation or $___ in 2016.

a. $53,000

b. $210,000

c. $265,000

3-1

a. $53,000

14

Retirement 3-1: Basic characteristics of defined contribution plans

The percentage of any contribution allocated to a particular employee is also limited by the requirement of the Internal Revenue Code (IRC) that no morethan $265,000 in annual compensation (in 2016, indexed) can be considered in formulating the allocation. Thus, if a plan calls for each participant to receive a contribution equal to 10% of annual compensation, the $300,000-per-year CEO
could receive only

a. $26,000

b. $26,500

c. $30,000

3-1

a. $26,000

10% of $265,000

15

Retirement 3-1: Basic characteristics of defined contribution plans

The limitation on annual additions to a participant’s account is the lesser of $53,000 (2016, indexed) or 100% of the participant’s compensation. The annual addition for any year is the sum of all EXCEPT

a. employer contributions

b. employee contributions

c. forfeitures

d. earnings

3-1

d. earnings

An annual addition is when “new” money is added to the account. Earnings are not “new” money; so earnings are not considered to be an annual addition.

16

Retirement 3-2: Basic characteristics of money purchase plans

Pension plans can hold no more than __% of the employer’s stock

a. 2%

b. 5%

c. 10%

3-2

c. 10%

17

Retirement 3-2: Basic characteristics of money purchase plans

Although the money purchase plan is a pension plan that requires the employer to contribute a fixed percentage of each participant’s annual compensation to individual participants’ accounts, they are, by definition:

a. defined contribution plans

b. defined benefit plans

a. defined contribution plans

18

Retirement 3-2: Basic characteristics of money purchase plans

EGTRRA (Economic Growth and Tax Reconciliation Act of 2001) equalized the contribution limits for employers and now all defined contribution plans have a __% limit

a. 15%

b. 25%

c. 35%

b. 25%

19

Retirement 3-2: Target benefit plans

Target benefit plan is one of three types of plans that skew employer contributions in favor of ____ plan participants—the other two plans that do the same are the defined benefit and age-weighted profit sharing plan

a. younger

b. older

b. older

20

Retirement 3-2: Target benefit plans

Mandatory funding?

Yes

a. Pension Plans

b. Profit Sharing Plans

a. Pension Plans

21

Retirement 3-2: Target benefit plans

Mandatory funding?

No (but “substantial and recurring”)

a. Pension Plans

b. Profit Sharing Plans

b. Profit Sharing Plans

22

Retirement 3-2: Target benefit plans

Employer stock limitation?

Yes, no more than 10%

a. Pension Plans

b. Profit Sharing Plans

a. Pension Plans

23

Retirement 3-2: Target benefit plans

Joint and survivor annuity, and pre-retirement annuity required?

Yes

a. Pension Plans

b. Profit Sharing Plans

a. Pension Plans

24

Retirement 3-2: Target benefit plans

Joint and survivor annuity, and pre-retirement annuity required?

No

a. Pension Plans

b. Profit Sharing Plans

b. Profit Sharing Plans

25

Retirement 3-2: Target benefit plans

Joint and survivor annuity, and pre-retirement annuity required?

No

a. Pension Plans

b. Profit Sharing Plans

b. Profit Sharing Plans

26

Retirement 3-2: Target benefit plans

Conway, age 53, was hired at a salary of $288,000 to fill the post of chief of operations for Scrub-A-Dog. The next year, he became eligible to participate in the target benefit plan. Like everyone else, Conway had the expectation of receiving 40% of compensation during each year of retirement. The rules governing defined contribution plans permit company contributions of up to $_____ (2016, indexed) to be allocated to Conway’s account.

a. $53,000

b. $265,000

c. $288,000

a. $53,000

27

Retirement 3-2: Target benefit plans

Advantages of a Target Benefit Plan

Older employees who enter the program can receive larger annual contributions.

Greater certainty of final retirement benefits is provided, as compared to profit sharing plans.

a. For the employee

b. For the employer

a. For the employee

28

Retirement 3-2: Target benefit plans

Advantages of a Target Benefit Plan

These plans are easier and less expensive to administer than defined benefit plans.

Employers that offer target benefit plans do not have to pay PBGC premiums.

Owner-employees and other higher-paid employees, who generally are older, get a larger share of annual employer contributions.

a. For the employee

b. For the employer

b. For the employer

29

Retirement 3-2: Target benefit plans

Disadvantages of Target Benefit Plans

Greater allocations to more recent but older employees, who make the same income as their younger colleagues, can create issues over equity.

Target benefit plans are defined contribution plans, so they are not insured by the Pension Benefit Guaranty Corporation (PBGC).

a. For the employee

b. For the employer

a. For the employee

30

Retirement 3-2: Target benefit plans

Disadvantages of Target Benefit Plans

Once it commits to the plan, the company must make annual contributions, even if it is experiencing business distress.

The goal of heavy allocations to the owner-employee’s account is constrained by the 25% employer deduction limit and the $53,000 individual account limit (2016, indexed).

a. For the employee

b. For the employer

b. For the employer