4-1. Employer-Sponsored Retirement Plans McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill...
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Transcript of 4-1. Employer-Sponsored Retirement Plans McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill...
Employer-Sponsored Retirement Plans Employer-Sponsored Retirement Plans
McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4Chapter 4
4-4
PLAN CHARACTERISTICS
• Participation Requirements
• Coverage Requirements
• Vesting Rules
• Accrual Rules
• Nondiscrimination Rules Testing
• Key Employee & Top-Heavy Provisions
4-5
PLAN CHARACTERISTICS
• Minimum Funding Standards
• Social Security Integration
• Contribution & Benefit Limits
• Plan Distribution Rules
• Qualified Survivor Annuities
• Qualified Domestic Relations Orders
• Termination Rules & Procedures
4-6
COVERAGE TESTS
• Ratio Percentage– 70% of Participants NOT in Highly
Compensated Group
• Average Benefit Test– Benefit Amount is 70% of Benefit Amount
for Highly - Compensated
4-7
VESTING
• Cliff Vesting
– Vested after 3 Years Service
• Gradual Vesting
– 20% a Year After Year 2
4-8
SAFE HARBORS
• Uniform Normal Retirement Benefit
• Uniform Post-Normal Retirement Benefits
• Uniform Subsidies
• Uniform Vesting & Service Crediting
• No Employee Contributions
• Period of Accrual
4-9
LIMITS & DEDUCTIONS
• Maximum Benefit – $165,000, or– 100% Highest Average for 3 Years– $5,000 Indexed Starting 2006
• Employers with Less than 101 Employees Use Different Computation Methods
4-10
DEFINED CONTRIBUTION PLANS
• Employees & Employers Contribute
• Employers Invest Contributions in Stocks
and Bonds
• No Guarantee of Benefits Amounts
• Possible Types– Profit - Sharing Plans– Stock Bonus Plans– Employee Stock Ownership Plans
4-11
INDIVIDUAL ACCOUNTS SOURCES
• Employer’s Contributions a % of Salary/Wages
• Employee’s Contributions a % of Salary/Wages
• Forfeitures
• Return on Investments
4-12
DEFINED CONTRIBUTION PLANS
• Section 401 (k)• Profit Sharing• Stock Bonus• ESOPs• SIMPLE• Section 403 (b) Tax Deferred Annuities • Section 457
4-13
SECTION 401(k) PLANS
• Also Cash or Deferred Arrangements (CODAS)
• Defer Income to Defined Contribution Plan
• For Employees of Private Sector or Tax-
Exempt Companies
• Investment Gains Taxed when Received
4-14
PROFIT – SHARING PLANS
• Fixed First $ of Profits - Specific % Pre - After - Tax Annual Profits
• Graduated First - $ of Profits –Contributions Increase as Profits Increase
• Profitability Threshold – Contributions
Only When Profits Fall Within Limits
4-15
STOCK BONUS PLAN
• Invest in Company Securities
• Must Meet Nondiscrimination Test
• Employees Vote May Like Shareholders
• May be Basis for 401 (k)s
4-16
ESOPs
• Similar to Stock Bonus Plans Except:
– Borrowed Money to Purchase Stock
– Used Money for Other Business
– May be Leveraged or Nonleveraged
– Company Repays ESOP to Repay Loan
4-17
SIMPLE
• For Companies with up to 100 Employees & $5,000 in Compensation
• Must be Only Retirement Plan
• Can be IRAs or 401 (k) s
• Meet Nondiscrimination & Vesting
• Limits up to $10,000 in 2005
4-18
HYBRID PLANS
• Combinations of Defined Benefit & Defined Contribution Plans
• Types– Cash Balance– Target Benefit– Money Purchase– Age Weighted Profits Sharing
4-19
TARGET BENEFIT PLAN
• Individual Accounts
• Total Benefits NOT Guaranteed
• Employers Use Actuarial Calculations
• Benefits Invested by Trustee
• Less Expensive for Employers
4-20
MONEY PURCHASE PLANS
• Benefit Based on Account Balance at Retirement
• Contributions Based on Formula
• Contributions NOT Tied to Company’s Performance
• Excise Tax Penalties for Failure to Make Contributions
4-21
INTEGRATION METHODS
• Defined Benefit Plans– Offset Approach– Excess Approach
• Defined Contribution Plans– Excess Approach
4-22
EXECUTIVE RETIREMENT BENEFITS
• Earns $300,000
• 3 - Year Average $205,000
• Exclude $95,000 from Defined Benefit Plan Formula
• Company May Set-Up a Nonqualified Deferred Compensation Plan Based on the $95,000
4-23
TOP HAT PLANS
• Unfunded
• Created for Highly Compensated or Other Select Groups
• Exempt from ERISA Title I– Vesting– Funding– Fiduciary Responsibilities
4-24
FUNDING MECHANISMS
• General Asset Approach (Unfunded)
• Corporate - Owned Life Insurance (Unfunded)
• Split - Dollar Life Insurance
• Rabbi Trusts (Unfunded)
• Secular Trusts (Funded)
• Employee - Owned Annuities (Funded)