Retirement Planning Flashcards
(32 cards)
Is a 401k a Qualified Plan?
Yes - a 401k is also known as a CODA
What are the four types of Pension Plans?
Defined Benefit Pension Plan (DB Plan)
Cash Balance Pension Plan (DB Plan)
Money Purchase Pension Plan (DC Pension Plan)
Target Benefit Pension Plan (DC Pension Plan)
What are the seven types of Profit Sharing Plans?
Defined Contribution Profit Sharing Plans
Profit Sharing Plans Stock Bonus Plans ESOPS 401k Plan Thrift Plans New Comparability Plans Age-Based Profit Sharing Plans
What is a pension plan?
a qualified retirement plan that pays a benefit, usually determined by a formula, the participant, until death
What is a profit sharing plan?
Promise of deferral of comp and tax After two years - in service withdrawals ok No mandatory funding 100% can be in company No joint or survivor requirement
All defined benefit plans are pension plans, but defined contribution plans can be either pension plans or profit sharing plans.
Pension plans can be either defined benefit or defined contribution, while all profit sharing plans are defined contribution plans.
What are the requirements for a qualified plan?
Eligibility - 21 or 1`2 months of year of service (at least 1,000 hours of service) (this can be reduced)
Coverage - Must provide benefits under the plan to a minimum number of nonhighly compensated employees.
Also, if employer makes a contribution (receives a benefit)
What are the requirements for a qualified plan?
Eligibility - 21 or 1 year of service (at least 1,000 hours of service) (this can be reduced)
Entrance date example
Page 7
How many employees must be covered under a qualified plan?
70% of nonhighly compensated employees
What is the definition of a highly compensated employee?
More than 5% owner (current or previous) - NOT 5%
More than $130k in compensation
What is the 50/40 test?
Lesser of 50 employees or 40% of employees
What is the 50/40 test?
50 employees or 40% of employees
Percentage test example
Page 19
Vesting example
Page 24
Who is a key employee for purposes of the top heavy test?
Greater than 5% owner
Greater than 1% owner with compensation of greater than $150k
Officer with comp of greater than $185k
What makes a plan that Top Heavy?
If > 60 percent of the benefits or contributions are going to key employees, think HEAVY
What are PBGC monthly and annual benefits?
$5,812.50 monthly
$69,750
What might be a typical formula for a pension benefit?
percent per year x years of service x salary formula
What is the maximum benefit from a defined benefit pension plan?
Lesser of $230k or three consecutive years of salary
What are the characteristics of a pension plan?
Mandatory Funding
Disallowance of in service withdrawals
Limited investment in company (10%)
Limited investment in Life Insurance
What are the 25 percent test and the 50 percent test?
If term policy, use 25% test: Premiums cannot exceed 25% of the employers contribution
If whole life policy, 50% test.
**Don’t forget the 100-to-1 Test. Death benefit of life insurance cannot exceed 100X monthly benefit.
DBPP versus DCPP
Actuary Commingles versus Separate Investment Risk Allocation of Forfeitures PBGC Benefits Credit for Prior Service Integration with Social Security Commingled Assets
Actuary - only DBPP
Comingles - DBPP NO while DCPP is Yes
Investment Risk - DBPP Company while DCPP is participant
Allocation of Forfeitures - DBPP to reduce costs while DCPP can either reduce costs or spread among participants
PBGC - DBPP Yes while DCPP no ($5,812.50/mo)
Benefits - DBPP is an estimate of the FV of payments while DCPP is the balance of the plan.
Credit for Prior Service - DBPP Yes while DCPP No
Integration with Social Security - both allow
Commingled - DBPP do not maintain separate accounts while DCPP do maintain separate accounts
What are the two tests for Integration with Social Security?
Excess Method: 0.75% x Years exceed limit x excess
Offset Method: (1) Lesser of 0.75% per year of service up to 35 years or (2) 50% of the overall benefit funding percentage per year of service.
