Who is a traditional DB Pension Plan suited for? 2.1
Older people bc it allows bigger contributions the older you are.
What are the advantages and disadvantages of a traditional DB Pension Plan? 2.1
- PBGC Insured
- You know exactly what you’ll benefit when you retire
- Employees might retire earlier because they can afford to retire
Disadvantages:
- Must use an actuary
- Expensive
- Complicated If the investments do poorly, the employer must still contribute
What does a pension plan mean? 2.1
Money must be added no matter what. The can be defined benefit or defined contribution. Four types include:
What plans does the PBGC cover? Who pays the premiums?
2.1
Defined benefit plans including cash value plans.
Max monthly PBGC payout is limited to less than $6000
Premiums are paid by the employer.
What is the max benefit in a defined benefit plan at the retirement age of 65?
The lesser of
- $230k annually or
- 100% of the highest average earnings over 3 years (topped at $290)
What is the flat amount formula for DB plans?
2.1
What is the flat percentage formula in DB plans?
2.1
How are all DB plans funded?
2.1
- Mandatory annual funding
- Earnings affect the required funding
- DB plan forfeitures
What things will decrease the required contributions to the plan?
Higher than expected
- investment returns
- Turnover of employees
- Mortality of employee
What is a DB(k) Plan?
2.2
- Hybrid section 401(k) and DB plan
- It must have automatic enrollment
- Must have a fully vested 50% match on the first 4% contributed by the employee
- Employee gets guaranteed income on retirement
- Employers are exempt from top-heavy rules(but not non-discrimination)
- More predictable costs
- simpler to run
What is a cash balance pension plan?
2.2
- A defined benefit plan with featured of a defined contribution plan.
- All of the investments are together and managed by the employer
- Max benefit is $230k or the highest avg 3 years
Advantages
- Insured by PBGC
- lower costs than traditional DB
Disadvantages
- The employer bears the investment risk
- the lump sum amount might be decreased if the plan is rolled over from a traditional
What are the attributes of 412(e)(3) plans?
- Funded through cash value life insurance
- Appropriate for companies with stable cash flows
Advantages
- Can put a lot of money into these plans
- Death Benefits
- Exempt from min funding standards
What is a money purchase pension plan?
- DC plan
- Mandatory annual contributions
- Max contributions are lesser of 100% of income or $58000
- No actuary
- No PBGC
- The firm can deduct up to 25% of the contributions
Disadvantages:
- Lacks contribution flexibility
- Only 10% of contribution can go into emoployer stock
What is a target benefit plan?
- A type of Defined CONTRIBUTION plan
- Actuary only in the first year
- Targets a retirement benefit, but they might not hit it
- No guarantee
- Favor older people
- Worker chooses where the investments will be
- $58000 max contribution rule
- Annual contributions are certain
- Benefits
What is the death benefit test for defined benefit pension plans?
2.1
DB plans use the 100 times test. The death benefit can’t exceed 100 times the participant’s projected monthly benefit.
How fast must DB plan vest?
Plan benefits attributable to employer contributions for a defined benefit plan must be vested (or nonforfeitable) at least as rapidly as 100% after five years of service. An alternative three- to seven-year graded vesting schedule may also be used.
ERISA requres reporting and disclosure of db plans to:
- PBGC
- Plan participants
- IRS
- DOL
What is the unit benefit formula for defined benefit plans?
2.1
What is section 415(b)?
For DB: Limits the pension benefits that may be provided under the plan to the lesser of $230k or 100% of the participants avg 3 years highest comp
For DC: Or contributions can’t exceed 100% and 58kk
