Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
4-1 Chapter 4 Employer-Sponsored Retirement Plans McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. RETIREMENT PLANS • Defined Benefits Plans • Defined Contribution Plans • Hybrid Plans 4-3 PLAN CHARACTERISTICS • • • • • • Participation Requirements Coverage Requirements Vesting Rules Accrual Rules Nondiscrimination Rules Testing Key Employee & Top-Heavy Provisions 4-4 PLAN CHARACTERISTICS • Minimum Funding Standards • Social Security Integration • Contribution & Benefit Limits • Plan Distribution Rules • Qualified Survivor Annuities • Qualified Domestic Relations Orders • Termination Rules & Procedures 4-5 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 4-6 VESTING • Cliff Vesting – Vested after 3 Years Service • Gradual Vesting – 20% a Year After Year 2 4-7 SAFE HARBORS • Uniform Normal Retirement Benefit • Uniform Post-Normal Retirement Benefits • Uniform Subsidies • Uniform Vesting & Service Crediting • No Employee Contributions • Period of Accrual 4-8 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 4-9 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 4-10 INDIVIDUAL ACCOUNTS SOURCES • Employer’s Contributions a % of Salary/Wages • Employee’s Contributions a % of Salary/Wages • Forfeitures • Return on Investments 4-11 DEFINED CONTRIBUTION PLANS • • • • • • • Section 401 (k) Profit Sharing Stock Bonus ESOPs SIMPLE Section 403 (b) Tax Deferred Annuities Section 457 4-12 SECTION 401(k) PLANS • Also Cash or Deferred Arrangements (CODAS) • Defer Income to Defined Contribution Plan • For Employees of Private Sector or TaxExempt Companies • Investment Gains Taxed when Received 4-13 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 4-14 STOCK BONUS PLAN • Invest in Company Securities • Must Meet Nondiscrimination Test • Employees Vote May Like Shareholders • May be Basis for 401 (k)s 4-15 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 4-16 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 4-17 HYBRID PLANS • Combinations of Defined Benefit & Defined Contribution Plans • Types – Cash Balance – Target Benefit – Money Purchase – Age Weighted Profits Sharing 4-18 TARGET BENEFIT PLAN • Individual Accounts • Total Benefits NOT Guaranteed • Employers Use Actuarial Calculations • Benefits Invested by Trustee • Less Expensive for Employers 4-19 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 4-20 INTEGRATION METHODS • Defined Benefit Plans – Offset Approach – Excess Approach • Defined Contribution Plans – Excess Approach 4-21 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 4-22 TOP HAT PLANS • Unfunded • Created for Highly Compensated or Other Select Groups • Exempt from ERISA Title I – Vesting – Funding – Fiduciary Responsibilities 4-23 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) 4-24 RABBI TRUSTS • Irrevocable Grantor Trusts • Unfunded, Exempt from ERISA • For Executives & Key Employees • Payments from General Assets • Assets Reimbursed from Trust • Not Very Secure 4-25