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42 Cards in this Set
- Front
- Back
Types of Defined Benefit Plans |
Defined Benefit Cash Balance |
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Annual Benefit Limit |
Lesser of $210,000 OR 100% Compensation |
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Final Average Pay |
Last 3 to 5 years Usually more beneficial to client |
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Career Average Pay |
Average compensation for all years of service. This is what a Cash Balance Pension plan is. |
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Cash Balance Plan |
Qualified DB plan that provides specified employer contributions and a guaranteed return. |
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Defined Benefit Plan |
Qualified DB plan that provides a specified retirement benefit based on a flat or unit formula. |
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Cash Balance Plan Interest Rate Methods |
The balance is based on allocations to the account (pay credits) and hypothetical earnings on the account (interest credits) Interest credited to a participant account may be either fixed or variable |
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Cash Balance Yearly Funding |
Required. Subject to minimum funding standard. |
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Defined Benefit Yearly Funding |
Required. Subject to minimum funding standard. |
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Defined Benefit Forfeitures |
MUST be applied to reduce employer contributions. |
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Cash Balance Forfeitures |
MUST be applied to reduce employer contributions. |
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Defined Benefit Vesting (Normal) |
May use 5 year cliff or 7 year graded. |
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Defined Benefit Vesting (Top Heavy) |
3 year cliff or 2-6 year graded |
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Cash Balance Vesting |
3 year cliff |
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DB Plans Employee Eligibility |
21 years and 1000 hours |
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DB Plans Ratio Percentage Test |
Percentage of NHCEs who benefit by participating in the retirement plan must equal at least 70% of the HCEs who benefit by participating in the plan |
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DB Plans Safe Harbor Coverage Test |
If the plan benefits 70% or more of the nonexcludible, nonhighly compensated employees (NHCE) then it passes safe harbor test 70% of all employees eligible. |
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DB Plans Average Benefits Test |
Plan must benefit a nondiscriminatory classification of employees The plan must provide an average benefit percentage for NHCEs that is at least 70% of the average benefit percentage of the HCEs 70% of the percentage of HCE participating. |
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DB Plans Minimum Participation |
50 employees OR the greater of 40% or 2 employees |
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Highly Compensated Employee |
5% Owner $120,000 or top 20% of HCE |
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Section 415 Limitation (Less than 10 years of SERVICE) |
Docked 10% for each year of service less than 10 years Past service of up to 5 years may be added if plan was added on for older participants |
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Section 415 Limitation (Less than 10 years of PARTICIPATION) |
Docked 10% for each year of participation less than 10 years |
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DB Plans Excess Method |
Amount above the base benefit percentage is the lesser ofThe base benefit percentage.75% of each year of service (not to exceed 35 years) |
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DB Plans Offset Method |
Permitted only in defined benefit plansThe maximum offset allowance is the lesser of.75% per year of service up to 35 years50% of the base benefit percentage per year of service |
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Top Heavy Plan |
More than 60% of plan benefits attributed to KEY Employees |
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Top Heavy Plan Minimum Contribution DB Plans |
2% nonelective non-key |
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DB Plans Actuarial Assumptions |
Interest Rate Turnover Rate Salary Scales (Increase plan cost) Benefit Cost Mortality (Higher mortality higher cost) **Verify |
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3 Types of DB Plan Termination |
Voluntary Standard Termination Voluntary Distress Termination Involuntary Termination |
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PBGC Exemptions |
Plans maintained for substantial business owners (10% or more) Plans maintained by professional service employers that have never had more than 25 active participants |
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How to increase DB Plan Benefit |
Change formula. |
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Floor-Offset Plan |
An employer maintaining a defined benefit and defined contribution plan. Defined Benefit = Floor Defined Contribution = Offset If DC > DB, all benefits come from DC. |
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Floor-Offset 401k/ESOP |
401k/ESOP cannot be used in floor-offset |
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Requirement to have Floor-Offset Plan |
1. DB cannot require employee contributions 2. DB and DC must apply to same employees 3. Offset be applied same way 4. Same investment options, etc. |
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IRC 414 Small Employer Eligible Combined Plan Employee Threshold |
Less than 500 employees |
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IRC 414 Small Employer Eligible Combined Plan Definition |
Combines a defined benefit with a defined contribution 401k |
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Actuarial Assumptions: Interest Rate |
Lower the interest rate used, the higher the projected cost.
And vice versa. |
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Actuarial Assumptions: Turnover Rate |
The higher the turnover rate assumption, the higher the amount of forfeitures, and the lower the plan costs.
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Actuarial Assumptions: Salary Scales |
Increasing salaries each year. They are an assumed growth in payroll, they will increase the plan cost.
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Actuarial Assumptions: Benefit Cost |
The larger the benefit promised, the larger the required contribution.
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Actuarial Assumptions: Mortality |
The higher the assumed mortality, the higher are plan costs.
If 100% vesting at death is not part of the plan, then the opposite is true due to the resulting forfeitures. |
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Failure to Meet Funding Target Penalty |
10% excise tax on aggregate unpaid minimum required contributions for all plan years remaining unpaid. |
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PBGC Max Benefit |
$5,011.36/Month or $60,136.32/Year |