Session 5 Fundamentals of Defined Contribution Plans

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 5Fundamentals of Defined Contribution Plans

2. Session Details

3. Qualified & Nonqualified Plans

4. Profit Sharing & Pension Plans

5. Annual Addition Limits • Annual additions are comprised of • employer contributions • employee contributions • forfeitures • IRC Section 415(c) limit on “annual additions” is the lesser of • 100% of compensation, or • $52,000 (2014)

6. Contribution Limits • Employer deduction limit: 25% of payroll (does not include employee deferral amounts) • Combined employee and employer contribution limit: $52,000 (2014) or 100% of compensation • Maximum includible compensation: $260,000 (2014)

7. Pension Plans & Profit Sharing Plans

8. Profit Sharing Plans Basic Provisions • 25% employer deduction limit • Employer contributions usually are discretionary, but must be “substantial and recurring” • Forfeitures usually are reallocated to remaining participants’ accounts Employer Participant

9. Defined Contribution Retirement Benefits

10. Practice Problem 1 Match each item in the left-hand column with the appropriate item in the right-hand column

11. Multiple Choice Question 2 Which one of the following is not a characteristic of a target benefit plan? • The retirement benefit is not certain; investment risk is borne by the participant. • Annual additions are limited to the lesser of 100% of compensation or $52,000 in 2014. • Forfeitures may be applied to reduce the employer’s contribution, or they may be reallocated to remaining participants. • The plan requires annual actuarial determination.

12. Multiple Choice Question 3 Which of the following plans are subject to a 25% limit on deductible employer contributions? • money purchase plans • profit sharing plans • target benefit plans • tandem (paired) plans • I and IV only • II and III only • I, III, and IV only • I, II, III, and IV

13. Multiple Choice Question 4 Which of the following statements are correct descriptions of qualified plans? • A target benefit plan is basically an age-weighted money purchase plan. • A target benefit plan is a defined benefit plan. • A money purchase plan is a pension plan. • A profit sharing plan is a flexible contribution plan. • I and IV only • II and IV only • I, III, and IV only • II, III, and IV only

14. Multiple Choice Question 5 Which of the following are characteristics of an age-weighted profit sharing plan? • An age-weighted allocation formula permits contributions to favor older employees rather than younger employees because the younger employees have more time to accumulate contributions and earnings in their accounts. • An age-weighted allocation formula permits contributions to individual accounts to exceed the Section 415 limitations. • If an age-weighted plan becomes top heavy, the vesting schedule would be limited to either a three-year cliff or six-year graded schedule; the plan also must provide a minimum contribution of 3% of pay to non-key employees. • An employer that uses an age-weighted allocation formula becomes subject to the minimum funding standards. • I and III only • II and III only • I, II, and III only • I, III, and IV only

15. Multiple Choice Question 6 Which one of the following objectives for establishing a profit sharing plan would be best met through use of an age-weighted profit sharing plan? • using the plan to motivate all employees • believing that it is more important to motivate employees than it is to retain them • maximizing contributions for older employees • seeking to provide rank-and-file employees with a solid basis for retirement income

16. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 5End of Slides