Assignment 4 - DC vs. DB Structures

Question 1

• plan sets the benef to achieve specific income replacement objs.
• ER makes the contib. necessary to fund the benef.
• ER bears the inv. risk
• can be integrated on the basis of SS benef.
• ER can bear inflation risk by relating final pay to the benef.
• benef. for EE’s who term. at younger ages can be more costly under DC

Answer 1

DB plan

Question 2

• plan sets the alloc. method of the contrib.
• indiv. acct for each partic. are maintained
• partic. bear the inv. risk
• ER portion is fixed
• forced to adjust contrib. levels in order to integrate with SS
• benef. for EE’s who term. at younger ages can be more costly under DC
• offer ER’s max flexibility in terms of cost commitment
• increase EE prod. and EE identifi. with the comp and the goals that can be achieved.
• if younger EE group, the plan is apt to have greater EE relations value
• can make contribs. on a before-tax basis
• lower admin costs than DB plans due to no having to pay premiumes to PBGC

Answer 2

DC plan

Question 3

plan that satisfies the requirements of ERISA and subsequent laws

1. contribs. made by ER are ded. as bus. exp up to certain limits
2. inv. income on contribs. are normally not subj. to fed’l income tax until paid out
3. not taxable income to EE until benefs. are distrib.

Answer 3

qualified retirement plan

Question 4

earnings above $110,000 (2010) and:
- top 20% of EE’s by pay
OR
- 5% owner

Answer 4

HCE = highly compensated EE

Question 5

limits on compensation recognized in retirement plans

- $245,000 in 2010

Answer 5

401(a)17

Question 6

*limits amt of benefs. paid to an indiv. EE under DB and the annual additions made by the EE under DC plan

DC plan – lesser of 25% of pay or $49,000 (2010)
DB plan – lesser of 100% of 3-yr avg pay or $195,000

Answer 6

Section 415 limits

Question 7

key employees requirements

Answer 7

used in top-heavy plan status.

• officer owning $120,000 or more
• 5% owner
• 1% owner w/ comp. over $150,000

Question 8

top heavy requirements

Answer 8

DC plan – 60% or more of plan assets held by “key EE’s”

DB plan – key EE’s have 60% or more of the projected benefs.

Question 9

vesting requirements

Answer 9

*value of AT and elect.(BT) EE contribs. must be fully vested at all times.
*ER contribs. must be vested when EE reaches plan’s normal ret. age
*otherwise, ER contribs at min:
DC plan – 6-yr graded; 3-yr at 100%
DB plan – 7-yr graded; 5-yr at 100%

Question 10

Sect. 410(a)(9)

min. distrib. requirements

Answer 10

• RP distrib. must start by age 70 1/2 unless still employed.
• 5% owner must start by age 70 1/2
• calc. is based on life expectancy of indiv. and beneficiary

Question 11

entry requirements

Answer 11

min – age 21; 1000 hours of service

Question 12

excludible EE’s

Answer 12

union; nonresident aliens; less than 21 years old; 6 mo. or less of service; work less than 17.5 hrs per week

Question 13

• parent/subsidiary (A owns 80% of B)
• brother/sister (group of 5 or fewer owners, have 80% ownership and at least 50% common ownership)
• affiliated service agreement

Answer 13

Controlled Groups - types

Question 14

• aggreg. of EE’s for qualif. testing purposes that would otherwise be considered separate
• all ERs to structure benef. programs to meet the competitive needs of separate bus. ops.

Answer 14

Qualified Separate Line of Business (QSLOB)

Question 15

coverage tests to ensure that the plan is nondiscrim. as to coverage

Answer 15

Section 410(b) tests 
(also known as Coverage Tests)

Question 16

– 70% of NHCEs
OR
– the percentage of the NHCEs cov’d by the plan is > / = 70% of the percentage of the HCEs cov’d

Answer 16

Ratio percentage tests

*Sect. 410(b) test

Question 17

• benefs rec’d or contribs by the NCE (on avg) is 70% or greater than the benefs rec’d or contribs by the HCE
• -DC = contribs.
• -DB = benefs.

Answer 17

Avg Benef. test

*Sect. 410(b) test

Question 18

SPD

Answer 18

Summary Plan Description

Question 19

SMM

Answer 19

Summ of Material Modification

Question 20

SAR

Answer 20

Summ Annual Report

Question 21

(4) factors that determine EE’s ret. benef. for DC plans

Answer 21

1. level of ER’s (and EE’s if applc.) contrib.
2. age at entry
3. ret. age
4. inv. earnings/losses

Question 22

• Since ERISA, DB plans expose ER to fin. liabil. if plan is term’d when there are unfunded liabil. for vested benefits.
• ER’s net worth is subj. to liens in favor of the PBGC
• smaller and newly formed ER’s usually develop DC plan instead

Answer 22

disadv. of DB plan

Question 23

EE’s of all corps. who are members of a controlled group of corps. are to be treated as if they were EE’s of a single ER.

Answer 23

Controlled Groups - defin.

Question 24

Due to ERISA, stmts that need to be automatically given to EE’s

Answer 24

1. SPD
2. SMM
3. SAR
4. stmt of benefs. for all EE’s who term. emplmnt
5. written explanation to any EE or beneficiary whose claim for benefs. is denied.

Question 25

Due to ERISA, items that must be made avail. to EE's

Answer 25

1. supporting plan docs 2. complete app made to IRS for determination of plans' tax-qualif'd status 3. complete copy of plan's annual fin. rpt 4. personal benefits stmt 5. plan term. rpt (if plan terms.)

Question 26

When do benefs. begin for DC and DB plans?

Answer 26

* within 60 days of the latest of the following (3) events: 1. plan year in which partic. terms employment 2. completion of 10 years of participation 3. turns age 65 or the normal retirement age specified in the plan

Question 27

Subject to Section 415 limits

Answer 27

- top-heavy min. contrib. amts - EE salary deferral contribs. - ER contribs. - forfeiture allocations

Question 28

how often does a benefit stmt have to be provided to partic?

Answer 28

once a qtr; PPA 2006