Rpa 1 - Chapters 4 And 5

Front 1

Advantages of Defined benefit plan

Back 1

(a) A defined benefit plan can be structured to achieve specific income replacement
objectives.
(b) A defined benefit plan can be integrated on the basis of Social Security benefits;
defined contribution plans are forced to adjust contribution levels if integration is
desired.
(c) Since the typical defined contribution plan provides the employee’s account balance is
payable in full in the event of death and, frequently, in the case of disability; an employer
interested primarily in providing retirement benefits can use available funds more
efficiently for this purpose under a defined benefit plan.
(d) A defined benefit plan may result in an equitable allocation of employer contributions
since the employee’s age, past service and pay all may be taken into account implicitly.
(e) The risk of inflation may be transferred from the employee to the employer by relating
the benefit to the employee’s final pay.
(f) The investment risk will be borne by the employer, not the employee, in a defined benefit
plan.
(g) Benefits for employees who terminate employment at younger ages can be more costly
under defined contribution plans than under defined benefit plans.

Front 2

Factors that will determine retirement benefit under defined contribution

Back 2

(a) The level of the employer’s (and, if applicable, employee’s) contribution
(b) Age at entry
(c) Retirement age
(d) Investment earnings (or losses).

Front 3

Tax advantage of Qualified retirement plan

Back 3

(a) Contributions made by the employer, within the limitations prescribed, are deductible as
a business expense.
(b) Investment income on these contributions normally is not subject to federal income tax
until paid out in the form of benefits.
(c) An employee is not considered to be in receipt of taxable income until benefits are
distributed—even though the employee may be fully vested and even though the
employee has the right to receive the amounts involved without restriction.
To obtain these tax benefits, the plan must achieve a qualified status by meeting the
requirements of the Internal Revenue Code and appropriate regulations and rulings issued by
the Internal Revenue Service (IRS).

Front 4

Section 415 compensation

Back 4

IRC Section 415 limits the amount of benefits that can be paid to an individual employee
under a defined benefit plan and the annual additions that can be made to an employee’s
account under a defined contribution plan. Limits for both types of plans are restricted to the
lesser of a dollar amount or a percentage of compensation. Section 415 compensation is used
in determining compliance in applying the Section 415 limits and for determining which
employees are highly compensated employees (HCEs) for plan nondiscrimination testing
purposes.

Front 5

Highly compensated employee (HCE)/nonhighly compensated employee (NHCE)

Back 5

The definition of a highly compensated employee (HCE) for plan nondiscrimination testing
purposes has changed since the Tax Reform Act of 1986 started detailed numerical testing
procedures. For years prior to 1997, the tax law contained extremely complicated provisions
defining who was to be considered a highly compensated employee for purposes of various
nondiscrimination requirements.
These provisions were greatly simplified by the Small Business Job Protection Act of 1996. In
2007, an employee is deemed a highly compensated employee if he or she:
(a) Was a 5% owner of the employer during the current or preceding year
(b) Had compensation in the preceding year of $100,000 (as of 2007 and indexed for
inflation in later years) and (at the election of the employer) was in the top 20% of
employees in terms of compensation for that year.
If the employer makes this election, the determination of who falls into the top 20% of the
employees is a two-step process:
(1) The employer must determine how many employees constitute 20%. Employers may
exclude:
(a) Employees who have not completed six months of service or who have not attained
age 21 by year-end
(b) Employees who normally work less than 171⁄2 hours per week or less than six months
during any year
(c) Nonresident aliens who have no U.S.-source income
(d) Employees included in a collective bargaining agreement that does not provide
participation in the plan if 90% or more of all employees of the company are
covered under such an agreement.
(2) The employer having subtracted excludable employees (except for union employees) then
multiplies the remaining number by 20%. Once the number is ascertained, the excluded
employees are added back in to determine which specific employees are in the top-paid
group.

Front 6

Nondiversion/exclusive benefit

Back 6

(a) The nondiversion/exclusive benefit requirements mandate that a plan must specifically
provide that it is impossible for the employer to divert or recapture contributions before
the satisfaction of all plan liabilities. With certain exceptions, funds contributed must be
used for the exclusive benefit of employees or their beneficiaries. Some of the limited
exceptions would include the following:
(1) At termination of a pension plan when, after all fixed and contingent obligations of
the plan have been satisfied, funds remain because of “actuarial error.” Such excess
funds may be returned to the employer.
(2) It is possible to establish or amend a plan on a conditional basis so that employer
contributions are returnable within one year from the denial of qualification if the
plan is not approved by the IRS.
(3) An employer can make a contribution on the basis that it will be allowed as a
deduction. If this is done, the contribution, to the extent disallowed, may be
returned within one year from the disallowance.
(4) Contributions made on the basis of a mistake in fact can be returned to the
employer within one year from the time they were made.

Front 7

Nondiscrimination testing and the coverage tests

Back 7

A qualified plan must meet specific nondiscriminatory requirements as to employees
covered under the plan. This requirement is set forth in Section 410(b) of the IRC,
and the tests required by this section often are called the “410(b)” or coverage tests.

Front 8

ERISA says you have to give employees these 5 things

Back 8

(1) The plan’s summary plan description (SPD)
(2) Any summary of material modification (SMM)
(3) A summary annual report (SAR)—a summary of the plan’s annual financial report.
The Pension Protection Act (PPA) of 2006 substituted the Notice of Funding Status
in lieu of the SAR for defined benefit plans beginning in 2008.)
(4) A statement of benefits for all employees who terminate employment. As noted in
the section below, a plan sponsor must supply a benefit statement to a participant
or beneficiary upon request, although the employer need not provide more than
one statement in every 12-month period. PPA modified the requirements for benefit
statements expanding the need for issuance beyond the need to fulfill a plan
member’s request in any 12-month period beginning after December 31, 2006.
Under PPA rules:
—If a participant in a defined contribution plan is entitled to direct plan
investments, he or she must receive a benefit statement once per quarter.
—If a participant in a defined contribution plan is not entitled to direct plan
investments, he or she must receive a benefit statement once per year.
—For an active, vested participant in a defined benefit plan, the plan sponsor must
provide either (1) a benefit statement once every three years, or (2) an annual
notice describing the availability of a benefit statement and the manner in which
the participant can obtain a benefit statement.
(5) A written explanation to any employee or beneficiary whose claim for benefits is
denied.

Front 9

Vesting requirements for a defined contribution plan

Back 9

(a) For a defined contribution plan:
(1) Since passage of the Pension Protection Act of 2006, after December 31, 2006:
(a) 100% vesting after three years of service
(b) Graded vesting, with 20% vesting after two years of service, increasing by 20%
multiples for each year until 100% vesting is achieved after six years.

Front 10

Section 401(a)(17) limit on includable compensation

Back 10

The Tax Reform Act of 1986 added Section 401(a)(17) to the IRC, limiting the amount of an
employee’s compensation that can be taken into account in determining contributions or
benefits under a qualified plan. This limit was originally set at $200,000 and was increased for
changes in the consumer price index (CPI). By 1993, it had increased to $235,840. However,
beginning in 1994, it was rolled back to $150,000. This revised limit also increased with
changes in the CPI, but only when the cumulative changes increased the then-effective limit
by at least $10,000. For 2001, the limit was $170,000. EGTRRA increased the includable
compensation limit to $200,000 in 2002 with indexing in future years in $5,000 increments
rather than $10,000 increments. By 2007 the includable compensation limit was $225,000.

Front 11

Section 415 limits for define contribution - amount added to employee plan cannot exceed

Back 11

(1) 100% of the employee’s compensation
(2) $45,000.
This $45,000 amount (as of 2007) is adjusted for changes in the CPI. The adjusted
amount is then rounded down to the next lower multiple of $1,000.

Front 12

Joint and survivor annuities

Back 12

In the case of a vested participant who retires under the pla, the accured benefit must be provided int he form of a QJSA

Front 13

Minimum distribution requirements

Back 13

distinct elements to these rules. The first is that distributions, either to an employee or a
beneficiary, must commence within stated periods of time. The second is that distributions
must be made in minimum amounts. The basic requirement is that distributions to a
participant must commence by April 1 of the year following the later of:
(1) The year in which the participant retires
(2) The year in which he or she attains age 701⁄2, and must be made by December 31 of
each year thereafter.
For years prior to 1996, the rule was different—distribution had to commence by April 1
of the year following the year in which the participant attained age 701⁄2, even though the
participant was still working. While this old rule no longer applies to most employees, it
still applies to 5% owners who must commence distribution when they reach age 701⁄2,
regardless of their employment status. The payments must be made over a period not
exceeding the employee’s life (or life expectancy) or the joint lifetimes (or joint life
expectancy) of the employee and his or her beneficiary.

Front 14

Top-heavy plans (defined contribution) if either

Back 14

(1) The sum of the account balances of all key employees participating in the plan is
more than 60% of the account balances for all covered employees
(2) The plan is part of a top-heavy group.

Front 15

An employer has two broad choices in selecting a plan to provide its retirement
benefits. One of these is the defined benefit plan under which the employer
provides a determinable benefit, usually related to an employee’s service and/or pay.
Under this approach, the employer’s cost is whatever is necessary to provide the
benefit specified. The second approach is the defined contribution plan in which the
employer’s contribution is fixed and accumulates to provide whatever amount of
benefit it can produce.

Back 15

memorize

Front 16

Advantages of defined contribution

Back 16

(a) Deferred profit-sharing plans offer employers maximum flexibility in terms of cost
commitment as well as opportunities to increase employee productivity.
(b) Through the use of employer securities as a plan investment, greater employee
identification with the company and its goals can be achieved.
(c) If the employee group covered is relatively young, the defined contribution plan is apt to
have greater employee relations value.
(d) Another possible advantage is the ability of employees to make contributions on a before
tax basis to defined contribution plans under Section 401(k).
(e) Defined contribution plans do not pay premiums to PBGC and therefore, may have lower
administrative costs than defined benefit plans.

Front 17

Ever since the passage of the Employee Retirement Income Security Act (ERISA), a
defined benefit plan exposes an employer to significant financial liability if the plan is
terminated when there are unfunded liabilities for vested benefits. An employer’s net
worth is subject to a lien in favor of the Pension Benefit Guaranty Corporation (PBGC)
if necessary to meet any liabilities assumed by PBGC in this event. Because the vast
majority of employees not covered by a private retirement program work for smaller
companies, and these small employers, as well as newly formed companies, are apt
to be reluctant to adopt a defined benefit plan and take on the potential liabilities
that are imposed by ERISA, many such employers will find the defined contribution
alternative, which has no such liabilities, to be a more palatable approach.

Back 17

Memorize

Front 18

Explain how controled groups limits the possibility of discrimination.

Back 18

The nondiscrimination requirements of the IRC could be easily circumvented if employers were
given complete flexibility in splitting employees among a number of subsidiaries. To eliminate
this potential for abuse, employees of all corporations who are members of a controlled group
of corporations are to be treated as if they were employees of a single employer.

Front 19

The controlled group rules can result in the aggregation of employee groups for
qualification testing purposes that would otherwise be considered separate. However,
an employer may be able to test a plan in a controlled group separately if it can show
that the employees covered by the plan are in a qualified separate line of business
(QSLOB). These rules are designed to allow employers to structure benefit programs
to meet the competitive needs of separate business operations or operating units in
separate geographic locations.

Back 19

memorize

Front 20

Permamecy Requirement

Back 20

While the employer may reserve the right to amend or terminate the plan at any time, it
is expected that the plan will be established on a permanent basis. If a plan is terminated
for any reason other than business necessity within a few years after it is established, this
will be considered as evidence that the plan, from its inception, was not a bona fide plan
designed for the benefit of employees. This could result in adverse tax consequences.

Front 21

2 non discriminatory tests

Back 21

A plan will be considered nondiscriminatory as to coverage if it meets one of the
following two tests: (1) the ratio percentage test or (2) the average benefit test.

Front 22

A major aspect of Title I of ERISA concerns the disclosure of information—to
participants and their beneficiaries and to the government. These requirements
generally apply to most tax-qualified plans, regardless of the number of participants
involved.

Back 22

Memorize

Front 23

ERISA says you have to provide these 5 things if employees ask

Back 23

(1) Supporting plan documents
(2) The complete application made to IRS for determination of the plan’s tax-qualified
status
(3) A complete copy of the plan’s annual financial report
(4) A personal benefits statement. While still retaining the right to request a benefit
statement within any 12-month period, PPA expanded issuance requirements as
described above.
(5) A plan termination report (IRS Form 5310) should the plan be terminated.

Front 24

Vesting requirement for a defined benefit plan

Back 24

(b) For a defined benefit plan:
(1) Since passage of the Tax Reform Act of 1986, after December 31, 1986:
(a) 100% vesting after five years of service
(b) Graded vesting with 20% vesting after three years of service, increasing by
20% multiples for each year until 100% vesting is achieved after seven years.

Front 25

Other vesting requirments companies must comply with

Back 25

a) Vested amounts of less than $5,000 may be paid in a lump sum at termination of
employment without employee consent; otherwise, an employee must consent to a
lump-sum payment and must have the right to leave his or her accrued benefit in the
plan until the later of age 62 or normal retirement age. A plan may not impose a
significant detriment on a participant who does not consent to a distribution. EGTRRA
made a direct rollover the default option for involuntary distributions that exceed $1,000
when the qualified retirement plan provides that nonforfeitable accrued benefits which
do not exceed $5,000 must be distributed immediately.
(b) If an employee receives payment for his or her accrued benefit and is later reemployed,
the service for which the employee received payment may be disregarded in determining
his or her accrued benefit after reemployment. The employee, however, must be
permitted to “buy back” the accrued benefit attributable to such service by repaying
the cash payment with compound interest. (In the case of a defined contribution plan,
such a buyback is required only before the employee has incurred five consecutive oneyear
breaks in service; and interest need not be paid.)
(c) Once vested, no forfeitures are permitted—even if termination of employment is due to
dishonesty. If a plan has more liberal vesting provisions than the law requires, however,
forfeitures are possible up to the time the employee would have to be vested under the
law.
(d) Any employee who terminates employment must be given written notification of his or
her rights, the amount of his or her accrued benefits, the portion (if any) that is vested,
and the applicable payment provisions.
(e) A terminated employee’s vested benefit cannot be decreased by reason of increases in
Social Security benefits that take place after the date of termination of employment.
(f) If the plan allows an active employee to elect early retirement after attaining a stated age
and completing a specified period of service, a terminated employee who has completed
the service requirement must have the right to receive vested benefits after reaching the
early retirement age specified. However, the benefit for the terminated employee can
be reduced actuarially even though the active employee might have the advantage of
subsidized early retirement benefits.
(g) Any plan amendment cannot decrease the vested percentage of an employee’s accrued
benefit. Also, if the vesting schedule is changed, any participant with at least three years
of service must be given the election to remain under the preamendment vesting
schedule (for both pre- and postamendment benefit accruals).
(h) The accrued benefit of a participant may not be decreased by an amendment of the
plan. This includes plan amendments that have the effect of eliminating or reducing an
early retirement benefit or a retirement-type subsidy, or eliminating or reducing the value
of an optional form of benefit with respect to benefits attributable to service before the
amendment. In the case of a retirement-type subsidy, this applies only with respect to a
participant who satisfies the preamendment condition for the subsidy, either before or
after the amendment.

Front 26

To achieve a tax-qualified status, a plan must observe two statutory limits on contributions and/or benefits. List them both.

Back 26

The first is a limit on the amount of an employee’s
compensation that may be taken into account when determining the contributions
or benefits made on his or her behalf. The second is a limit on the annual additions
that may be made to an employee’s account in the case of a defined contribution
plan, or on the benefits payable to an employee in the case of a defined benefit
plan.

Front 27

Section 415 limits for define benefit - amount added to employee plan cannot exceed

Back 27

(1) 100% of the participant’s high three-year average compensation
(2) $180,000 (as of 2007 and subsequently adjusted for inflation).

Front 28

Benefits must start within 60 days of the last of these three events

Back 28

(1) The plan year in which the participant terminates employment
(2) The completion of ten years of participation
(3) Attainment of age 65 or the normal retirement age specified in the plan.

Front 29

Top heavy plans (defined benefit)

Back 29

(1) The present value of the accumulated accrued benefits of all key employees
participating in the plan is more than 60% of the present value of the accumulated
accrued benefits of all covered employees.
(2) The plan is part of a top-heavy group.

Front 30

Being top-heavy potentially triggers

Back 30

(1) faster vesting for non-key employees
(2) minimum benefitsfor non-key employees.

Front 31

Advantages of a defined benefit pension plan include

Back 31

Benefits for employees who terminate employment at younger ages can be more costly under defined contribution plans than under defined benefit plans.
II. A final pay plan generally transfers preretirement inflation risk to theemployer.

Front 32

Top Heavy plan if either

Back 32

1) the sum of account balances of all key employees participating in the plan is more that 60%
2) the plan is part of a top-heavy group

Front 33

Value of defined contribution plan (DC) amounts for younger employees

Back 33

The amount an employer contributes for each employee under a defined contribution plan
is usually expressed as a percentage of the employee’s current pay (for the year involved),
with the result that each employee, regardless of age, receives the same percentage-of-pay
contribution. By contrast, the allocation of employer contributions under a final-pay defined
benefit plan is such that age and prior service also are taken into account. Thus, the amount
of aggregate employer contributions allocated to younger employees usually is much higher
under a defined contribution plan than it is under a defined benefit plan.
It is possible, though, to design a defined contribution plan with contributions that increase
with age and service while taking steps to avoid discriminatory results. In such a plan, the
pattern of allocations would more closely resemble that of a defined benefit plan.

Front 34

Employee bears investment risk in DC

Back 34

Under defined contribution plans, the employee 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 is borne by the employer. (

Front 35

Impact of inflation

Back 35

Under defined contribution plans, the retirement benefits an employee receives are the result
of contributions based on the employee’s career average earnings (not final three- or fiveyear-
average before retirement). Some mitigation of inflation risk does take place during the
employee’s preretirement years, in that current and future contributions take the accumulated
effects of inflation into account. Also, to the extent that an employee does not invest a large
portion of his or her contributions into “safe” investment vehicles that guarantee the
principal, contributions invested in equity-type investments offer some inflation protection.
However, no postretirement inflation protection is provided under a defined contribution plan
because of the very nature of the employer’s commitment. By contrast, the typical final-pay
defined benefit plan provides for an initial level of income that reflects inflation up to the time
of retirement and also some defined benefit arrangements provide “ad hoc” increases to
retirees from time to time. It is almost unheard of for defined contribution plans to update
accrued benefits to take inflation into account.
Table 5.2 on page 82 illustrates the impact of inflation on the replacement percentage of
final pay for defined contribution plans when future earnings growth is taken into account.
For an individual with the entry age of 30 and entry salary of $12,000, the $25,668 annual
annuity payment at the age of 65 ($2,139  12 months) purchased by the accumulated
funds at retirement represents only 56.4% of the $45,532 final pay.

Front 36

Concept of matching DC

Back 36

Defined contribution plans are often contributory, that is, both the employer and theemployee contribute. The employer’s contribution is usually a match or multiple of the
employee’s contribution. For example, the plan could call for the employer and employee each to contribute 5% of the employee’s compensation; or the employee’s contribution could be set at 3% of compensation with the employer contributing 6%.

Front 37

Social Security integration DC

Back 37

Section 401(l) 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.
In essence, 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.

Front 38

Permitted disparity to intergrate with SS in DC plans

Back 38

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 Social Security taxable wage base.
Regulations require that the difference between these two employer contribution levels
cannot exceed a certain amount—called the permitted disparity.

Front 39

Limits on annual additions for DC plans

Back 39

Under a defined contribution plan, the maximum annual addition that can be made is limited
to the lesser of 100% of compensation or $45,000 (in 2007) indexed for inflation. Annual
additions include all employer and employee contributions plus any reallocated forfeitures.

Front 40

Employer deduction limit DC

Back 40

There is also a uniform employer deduction limit of 25% of compensation for all defined contribution plans.

Front 41

Three major types of DC plans

Back 41

money purchase pension plans
profit-sharing plans
stock ownership plans.

Front 42

What is a Section 401(k) plans

Back 42

Although 401(k) plans are typically referred to in common usage as a type of retirement plan,
in actuality Section 401(k) is a provision of the IRC that is coupled with an underlying plan
structure to permit employees to contribute a portion of their salary into the plan on a taxdeferred
basis (and earnings accumulate tax free until the funds are withdrawn). 401(k)-type
plans have grown among private employers to become the preeminent and most widely
utilized retirement savings vehicle. Since 401(k) plans can be configured with employee
contributions only, or with a variety of employee and employer contribution formulas, these
plans offer employers considerable flexibility in terms of plan designs. These plans afford
employees attractive tax-deferral opportunities but also place stipulations on employee
opportunities to access plan funds once contributed to the plan.

Front 43

What types of entities are permitted to offer a 403(b)?

Back 43

Allowable employers under Section 403(b) include nonprofit organizations qualified under
Section 501(c)(3) of the IRC, public school systems, public colleges and public universities.
Originally, Section 403(b) plans restricted underlying plan investments to insurance contracts
and annuities. The ability to offer mutual fund products under 403(b) plans was made
permissible by ERISA. Increasingly, the trend toward uniformity in plan requirements has
made 403(b) plans subject to many of the same requirements that apply to 401(k)s.

Front 44

Retirement savings options for small employers

Back 44

Legislative attempts have been made to offer smaller employers a variety of retirement
savings vehicles that provide similar tax-favored benefits but without all of the complicated
requirements associated with qualified plans. The small employer plan options would fall
within the category of plan types with more simplified compliance requirements. These
include simplified employee pensions (SEPs) and savings incentive match plans for employees
(SIMPLEs). Keogh plans allow unincorporated employers to receive the same benefits as
incorporated employers offering qualified plans.

Front 45

Individual retirement accounts (IRAs)

Back 45

For those saving for their own retirement needs outside of their employer plan, individual
retirement accounts (IRAs) are used. Created by ERISA, Congress has made considerable
changes to the law regarding IRAs, and these changes have resulted in the offering of
different types of IRAs. The original traditional type of IRA allowed taxpayers to reduce their
taxable income and receive a tax deduction by the amount of their contribution into the IRA.
Later, Congress only permitted tax-deductible IRAs if the taxpayer’s income fell below certain
thresholds depending on tax filing status. The result of this requirement was that IRAs could
be either deductible or nondeductible in nature.

Front 46

Roth IRAs

Back 46

Contributions to Roth IRAs are not tax deductible when made, but earnings accumulate tax
deferred initially and subsequently are distributable tax free if certain conditions are met.
Withdrawals of regular annual Roth contributions are tax free at any time since taxes have
already been paid on these amounts. Withdrawals of earnings from Roth IRAs are tax free
(rather than tax deferred) if the distribution is considered to be a qualified distribution. A
qualified distribution is a distribution that is made at least five years from the first of the year
in which the Roth account was established and meets at least one of the triggering conditions
for distribution under the law.

Front 47

What is a money puchase plan?

Back 47

account, employer contributions, generally made on an after-tax basis, are either a fixed
percentage of pay or a fixed dollar amount, and annual additions are limited to the amounts
discussed in Question 7. The plan is not subject to plan termination provisions applicable to
defined benefit plans.
This type of plan was used quite frequently before the enactment of the Economic Growth
and Tax Relief Reconciliation Act of 2001 (EGTRRA). The plan was paired with profit-sharing
plans to achieve the maximum deductible contribution allowance. Prior to EGTRRA, profitsharing
plans, able to determine their annual contributions on an annual basis, were only
permitted to make contributions of 15% of compensation; EGTRRA changed the law
allowing a full 25% into profit-sharing plans. The use of money purchase plans has declined
because of this change.

Front 48

What is a profit sharing plan?

Back 48

Profit-sharing plans are 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.) Also, these plans often allow
employee contributions as well and sometimes they are structured with an employer matching
formula. These plans can be structured and used as the employer’s primary retirement plan or
they can be coupled with plans that qualify under Section 401(k), discussed in Question 12.
Employer contributions for profit-sharing plans could range up to 25% of compensation.

Front 49

What is a stock ownership plan?

Back 49

The main distinguishing characteristic of a stock ownership plan is that it is created to invest
primarily in employer securities. Whereas most qualified plans must prudently diversify plan
assets to comply with the fiduciary standards of the Employee Retirement Income Security Act
(ERISA), a stock ownership plan is free of this requirement and can invest up to 100% of plan
assets in qualifying employer securities. A primary favorable benefit is that a leveraged ESOP is
used in conjunction with debt financing.

Front 50

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 deferredcompensation plans by creating IRC Section 457.

Back 50

memorize

Front 51

What is a limitation of defined contribution retirement plan deisgn?

Back 51

In general, they offer limited inflation protection once benefit distribution has commenced.

Front 52

What are 2 advantages of 401k?

Back 52

I. They can be configured with employee contributions only, or with a variety of employee and employer contribution formulas.
II. They can include loan features to allow employees access to plan funds without severe tax consequences from early withdrawals.

Front 53

All of the following are characteristics of a mony purchase plan

Back 53

B. The plan is not subject to plan termination provisions of the Employee Retirement Income
Security Act.
C. The plan is subject to the defined contribution annual limits.
D. The plan is required to maintain individual accounts for employees.
E. The plan’s employer contributions are either a fixed amount or a fixed percentage of pay.