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Session 4 Defined Benefit Plans and Discrimination

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits. Session 4 Defined Benefit Plans and Discrimination. Session Details. Defined Benefit Plan. A promised pension benefit guaranteed by the sponsor

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Session 4 Defined Benefit Plans and Discrimination

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  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 4Defined Benefit Plans and Discrimination

  2. Session Details

  3. Defined Benefit Plan • A promised pension benefit guaranteed by the sponsor • Maximum contribution: the actuarially determined amount needed to fund a pension of the lesser of 100% of salary or $210,000 (2014)

  4. Defined Benefit Plan Benefit Formulas Flat benefit: Service is not considered • Benefit is flat amount or percentage of earnings • Service reduction may be used: reduced benefit for <X years of service Unit benefit: Service increases benefit • Benefit is a dollar amount per year of service or a percentage of earnings per year of service • Participant accrues additional benefit each year • Service limitation may be used; considers years of service up to specified maximum

  5. Benefit Formula Examples

  6. Defined Benefit Plan Earnings Definition • Career-average pay: average earnings over plan participation period • Final-average pay: average earnings over final 3 or 5 years, or average highest 3 or 5 of last 10 years

  7. Factors Affecting Annual Retirement Benefits in a Defined Benefit Plan Retirement Age • Normal retirement: Stated by plan document, typically age 65 • Retirement after normal retirement is adjusted upward, and before a normal retirement-age 62 the benefit is adjusted downward Years of Plan Participation • (if maximum benefit formula of $210,000 is used) • 10% reduction in maximum dollar limitation on normal retirement benefit for each year of plan participation (or year of service) less than 10

  8. Defined Benefit Plan Employer Participant

  9. Defined Benefit Plan Minimum Participation Test Defined benefit plans also must satisfy the minimum participation (50/40) test. The plan must benefit at least the lesser of • 50 employees, or • the greater of: • 40% of all the company’s ERISA eligible employees, or • two employees (one employee if there is only one employee)

  10. Minimum Coverage Tests • A qualified plan must satisfy one of two coverage tests for at least one day of each quarter: • Ratio Percentage Test: Percentage of eligible non-HCEs benefiting under plan must be at least 70% of percentage of HCEs benefiting • Average Benefits Test: Average benefit, as a percentage of compensation, for non-HCEs must be at least 70% of that for HCEs • Employees excluded from the coverage tests: under age 21, or less than one year of service, or covered by a collective bargaining agreement

  11. Highly Compensated Employee • Was a “5% owner” (ownership of >5%) in the determination year or in the preceding plan year or • In 2014, a person whose compensation was in excess of $115,000 in the previous year (2013) is a highly compensated person. • Employer has the option to limit highly compensated to the top-paid 20% employees based upon preceding year’s compensation.

  12. Multiple Choice Question 1 Which of the following best describes the average benefits test? • The percentage of NHCs benefited by the plan must be at least 70% of the percentage of HCs benefited by the plan. • Plan benefits for NHCs must be 70% of all employees’ benefits. • The plan must benefit a nondiscriminatory classification of employees and the average benefit percentage for NHCs must be 70% of the average benefit percentage for HCs. • The plan must benefit at least 70% of all employees.

  13. Multiple Choice Question 2 Which of the following best describes the ratio percentage test? • The percentage of NHCs benefited by the plan must be at least 70% of the percentage of HCs benefited by the plan. • Plan benefits for NHCs must be 70% of all employees’ benefits. • The plan must benefit a nondiscriminatory classification of employees and the average benefit percentage for NHCs must be 70% of the average benefit percentage for HCs. • The plan must benefit at least 70% of all employees.

  14. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 4End of Slides

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