Cfp 504 - Module 2

Front 1

Types of Defined Benefit Plans

Back 1

Defined Benefit

Cash Balance

Front 2

Annual Benefit Limit

Back 2

Lesser of $210,000 OR 100% Compensation

Front 3

Final Average Pay

Back 3

Last 3 to 5 years

Usually more beneficial to client

Front 4

Career Average Pay

Back 4

Average compensation for all years of service.

This is what a Cash Balance Pension plan is.

Front 5

Cash Balance Plan

Back 5

Qualified DB plan that provides specified employer contributions and a guaranteed return.

Front 6

Defined Benefit Plan

Back 6

Qualified DB plan that provides a specified retirement benefit based on a flat or unit formula.

Front 7

Cash Balance Plan Interest Rate Methods

Back 7

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

Front 8

Cash Balance Yearly Funding

Back 8

Required. Subject to minimum funding standard.

Front 9

Defined Benefit Yearly Funding

Back 9

Required. Subject to minimum funding standard.

Front 10

Defined Benefit Forfeitures

Back 10

MUST be applied to reduce employer contributions.

Front 11

Cash Balance Forfeitures

Back 11

MUST be applied to reduce employer contributions.

Front 12

Defined Benefit Vesting (Normal)

Back 12

May use 5 year cliff or 7 year graded.

Front 13

Defined Benefit Vesting (Top Heavy)

Back 13

3 year cliff or 2-6 year graded

Front 14

Cash Balance Vesting

Back 14

3 year cliff

Front 15

DB Plans Employee Eligibility

Back 15

21 years and 1000 hours

Front 16

DB Plans Ratio Percentage Test

Back 16

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

Front 17

DB Plans Safe Harbor Coverage Test

Back 17

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.

Front 18

DB Plans Average Benefits Test

Back 18

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.

Front 19

DB Plans Minimum Participation

Back 19

50 employees OR

the greater of 40% or 2 employees

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Highly Compensated Employee

Back 20

5% Owner

$120,000

or top 20% of HCE

Front 21

Section 415 Limitation (Less than 10 years of SERVICE)

Back 21

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

Front 22

Section 415 Limitation (Less than 10 years of PARTICIPATION)

Back 22

Docked 10% for each year of participation less than 10 years

Front 23

DB Plans Excess Method

Back 23

Amount above the base benefit percentage is the lesser ofThe base benefit percentage.75% of each year of service (not to exceed 35 years)

Front 24

DB Plans Offset Method

Back 24

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

Back 25

More than 60% of plan benefits attributed to KEY Employees

Front 26

Top Heavy Plan Minimum Contribution DB Plans

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2% nonelective non-key

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DB Plans Actuarial Assumptions

Back 27

Interest Rate

Turnover Rate

Salary Scales (Increase plan cost)

Benefit Cost

Mortality (Higher mortality higher cost)

**Verify

Front 28

3 Types of DB Plan Termination

Back 28

Voluntary Standard Termination

Voluntary Distress Termination

Involuntary Termination

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PBGC Exemptions

Back 29

Plans maintained for substantial business owners (10% or more)

Plans maintained by professional service employers that have never had more than 25 active participants

Front 30

How to increase DB Plan Benefit

Back 30

Change formula.

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Floor-Offset Plan

Back 31

An employer maintaining a defined benefit and defined contribution plan.

Defined Benefit = Floor

Defined Contribution = Offset

If DC > DB, all benefits come from DC.

Front 32

Floor-Offset 401k/ESOP

Back 32

401k/ESOP cannot be used in floor-offset

Front 33

Requirement to have Floor-Offset Plan

Back 33

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.

Front 34

IRC 414 Small Employer Eligible Combined Plan Employee Threshold

Back 34

Less than 500 employees

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IRC 414 Small Employer Eligible Combined Plan Definition

Back 35

Combines a defined benefit with a defined contribution 401k

Front 36

Actuarial Assumptions: Interest Rate

Back 36

Lower the interest rate used, the higher the projected cost.

And vice versa.

Front 37

Actuarial Assumptions: Turnover Rate

Back 37

The higher the turnover rate assumption, the higher the amount of forfeitures, and the lower the plan costs.

Front 38

Actuarial Assumptions: Salary Scales

Back 38

Increasing salaries each year. They are an assumed growth in payroll, they will increase the plan cost.

Front 39

Actuarial Assumptions: Benefit Cost

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The larger the benefit promised, the larger the required contribution.

Front 40

Actuarial Assumptions: Mortality

Back 40

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.

Front 41

Failure to Meet Funding Target Penalty

Back 41

10% excise tax on aggregate unpaid minimum required contributions for all plan years remaining unpaid.

Front 42

PBGC Max Benefit

Back 42

$5,011.36/Month or $60,136.32/Year