Employee Benefits & Retirement Chapter 4

Forfeitures

Amounts from the accounts of employees who terminated their employment prior to earning vesting rights.

Fiduciary

Individuals who manage employee-benefit plans and retirement plan funds.

Equal Payments

Reflect a belief that all employees should share equally in the company's gain to promote cooperation among employees.

133 1/3 Percent Rule

The annual accrual rate cannot exceed 133 1/3 percent of the accrual rate for any prior year

Prior to the CARES Act, the maximum amount available for loans from an employer-sponsored retirement account was the lesser of

$50,000 or 50% of the vested account balance

Annual figures from the Bureau of Labor Statistics (BLS) help paint a picture of the number of Americans who participate in a retirement plan at work. According to the BLS, approximately what percent of U.S. civilian workers (full and part-time) participated in a "Pension Plan" at work in 2018?

20%

Annual figures from the Bureau of Labor Statistics (BLS) help paint a picture of the number of Americans who participate in a retirement plan at work. According to the BLS, approximately what percent of U.S. civilian workers (full and part-time) participated in a retirement plan at work in 2018?

50%

The penalty for the failure of an individual to take required minimum distribution (RMD) from his or her qualified retirement plan is a(n)

50% excise tax

Proportional Payments to Employees Based on Their Annual Salary

A belief that all employees should share the company's gain in proportion to annual salary.

Proportional Payment to Employee Based On Their Contribution to Profits

A belief that employees should share the company's gain based on their contributions to profit generation.

Nonleveraged ESOPs

A company contributes stock or cash to buy stock. The stock is then allocated to the accounts of participants. Nonleveraged plans are stock bonus plans

Stock Bonus Plan

A profit-sharing plan paid in employer stock instead of cash.

Annuity

A series of payments for the life of the participant and beneficiary. Annuity contracts are usually purchased from insurance companies, which make payments according to the contract.

Average Benefit Test

A test for coverage requirements that determines whether qualified plans benefit a "nondiscriminatory classification" of employees and possess an "average benefit percentage" for non-highly compensated employees that is at a minimum 70 percent of the average benefit percentage for highly compensated employees covered by the plan.

Ratio Test

A test for coverage requirements that determines whether qualified plans cover a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees covered by the plan.

Target Benefit Plans

A type of hybrid retirement plan that calculates benefits in a fashion similar to defined benefit plans based on formulas that use income and years of service. However, these target benefit plans are fundamentally defined contribution plans, because the benefit amount at retirement may be more or less than targeted benefit amount based on the investment performance of the plan assets

Cash Balance Plans

A type of hybrid retirement plan that defines benefits for each employee by reference to the amount of the employee's hypothetical account balance

Cash Balance Plan

A type of hybrid retirement plan that defines benefits for each employee by reference to the amount of the employee's hypothetical account balance.

Money Purchase Plans

A type of hybrid retirement plan that is a defined contribution plan because the benefit is based on the account balance at retirement. However, these plans possess the funding requirements of defined benefit plans because employers must make annual contributions according to the designated formula for the plan

Age-Weighted Profit-Sharing Plans

A type of hybrid retirement plan; fundamentally a defined contribution plan because benefit amounts fluctuate according to how well the investments of plan assets perform. Consideration of age in these plans is similar to defined benefit plans because employers contribute disproportionately more to the accounts of older employees based on a projected hypothetical benefit at normal retirement age.

Keen sponsors a qualified defined benefit retirement plan. The plan has the maximum allowable Graded vesting provision. Jamie begins working full-time for Acme in July 2019. She enrolls in her employer-sponsored plan the first day of the month after she is hired. When will Jamie be fully vested?

After seven years of service

Permitted Disparity Rules

Allow companies to explicitly take into account Social Security OASDI benefits when determining pension benefits.

Six-Year Graduated Schedule

Allows workers to become 20 percent vested after two years and to vest at a rate of 20 percent each year thereafter until they are 100 percent vested after six years of service.

Qualified Joint and Survivor Annuity (QJSA)

An annuity for the life of the participant with a survivor annuity for the participant's spouse.

All of the following are principal advantages of a qualified retirement plan EXCEPT: - Employer contributions to a qualified retirement plan are tax deductible as a business expense - An employee is not considered to be in receipt of taxable income upon receipt of distributions from a qualified retirement account - Investment income in a qualified retirement account is tax deferred - Employee contributions to a qualified retirement plan are tax deductible

An employee is not considered to be in receipt of taxable income upon receipt of distributions from a qualified retirement account.

Top-Heavy

Apply to minimum benefits accrual and vesting rights. Plans are said to be top-heavy if the accrued benefits or account balances for key employees exceed 60 percent of the accrued benefits or account balances for all employees.

Michelle took a loan from her employer-sponsored retirement plan in 2019. She heard that the CARES Act has provisions to help with individuals with outstanding loans from qualified retirement plans. Which of the following is (are) potential relief she may be provided under the CARES Act? I. Her loan repayments may be suspended by her employer through December 31, 2020. II. The terms of her loan may be extended one year.

Both I and II

Qualified Individuals for coronavirus-related distributions include an individual I. whose spouse has been diagnosed with COVID-19. II. furloughed due to COVID-19.

Both I and II

Which of the following statements concerning defined contribution pension plans is (are) true? I. The contribution rate is fixed. II. The retirement benefit varies.

Both I and II

The Secure Act introduced a new exception to the 10% additional tax for early distributions under qualified retirement accounts for qualified birth or adoption expenses. A mother and father that adopt twins in 2020. Which of the following statements is true for this married couple?

Both of them would be eligible to take up to a $10,000 distribution that would qualify as a qualified birth or adoption distribution.

Hybrid Plans

Combine features of defined benefit and contribution plans. Four common hybrid retirement plans include cash balance plans, target benefit plans, money purchase plans, and age-weighted profit-sharing plans.

Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt?

Defined Benefit Plan

John is 73 years young and working for his employer. He plans to continue working until at least age 75. He has accumulated substantial retirement assets in the 401(k) plan sponsored by his employer. John will be required to take a required mandatory distribution (RMD) from his 401(k) this year?

Disagree

All of the following statement(s) about qualified coronavirus-related distributions (are) true EXCEPT

Distributions are subject to the 10% additional tax if the plan participant is under the age of 59.5

Leveraged ESOPs

ESOPs in which the company borrows money from a financial institution to purchase company stock.

All but which of the following provisions of the SECURE Act started January 1, 2020?

Elective deferrals for long-term, part-time employees to 401(k) plans.

Roth 401(k) plans differ from 401(k) plans in which two ways?

Employee contributions are taxed at the individual's tax rate, upon retirement employee withdrawals are not taxed

Cliff Vesting

Enables employees to earn 100 percent vesting rights after no more than three years of service.

Minimum Funding Standards

Ensure that employers contribute the minimum amount of money necessary to provide employees and beneficiaries promised benefits.

Tax-Deferred Annuity (TDA)

Established by Section 403(b) of the Internal Revenue Code, the TDA is a type of qualified retirement plan for employees of nonprofit organizations such as churches, private and public schools and colleges, hospitals, and charitable organizations.

Defined contribution plans guarantee particular benefit amounts to participating employees. True or False?

False

Profitability Threshold Formula

Fund profit-sharing pools only if profits exceed a predetermined minimum level but have a maximum payout level

Profitable Threshold Formulas

Funds profit-sharing pools only if profits exceed a predetermined minimum level but fall below some established maximum level.

Defined Benefit Plan

Guarantee retirement benefits specified in the plan document. This benefit usually is expressed in terms of a monthly sum equal to a percentage of a participant's preretirement pay multiplied by the number of years he or she has worked for the employer.

Fractional Rule

Guards against backloading in retirement plans, this rule applies to participants who terminate their employment prior to reaching normal retirement age. It also stipulates that benefit accrual upon termination be proportional to normal retirement benefits.

Three Percent Rule

Guards against backloading in retirement plans. A participant's accrued benefit cannot be less than 3 percent of the normal retirement benefit, assuming the participant began participation at the earliest possible age under the plan and she or he remained employed without interruption until age 65 or the plan's designated normal retirement age.

Pension Equity Plans

Hybrid retirement plans that are similar to cash balance plans, except that these plans credit employees' accounts with points based on years of service.

Which of the following statements about retirement ages in defined benefit pension plans is (are) true? I. The normal retirement age in most plans is 65. II. The early retirement age is the earliest age at which an employee can retire without receiving actuarially reduced benefits.

I only

Which of the following statement is true about the new long-term, part-time employee eligibility requirement under the Secure Act? I. Eligible part-time employees will have completed at least 1000 hours of service each year for three consecutive years and are age 21 or older. II. Eligible part-time employees are required to be allowed to make elective deferrals to the 401(k) plan.

II only

Which of the following statements concerning defined benefit and defined contribution pension plans is (are) true? I. The employer bears the investment risk with a defined contribution plan. II. Defined benefit plans favor workers who enter the plan at older ages.

II only

Which of the following statements is (are) true regarding the taxation of distributions from qualified retirement accounts? I. Distributions are never taxable. II. In-service distributions taken before age 59.5 may be subject to an additional ten percent tax.

II only

Acme sponsors a qualified defined contribution retirement plan. The plan has the maximum allowable Cliff vesting provision. Jennifer begins working full-time for Acme in April 2017. She enrolls in her employer-sponsored plan the first day of the month after she is hired. Her employer makes a 3% non-elective contribution to the plan and Jennifer elects to defer 3% of her salary to the plan. When will Jennifer's elective deferrals be vested?

Immediately

Graduated First Dollar of Profit Formula

In profit-sharing plans, uses a specific percentage based on either pretax or after-tax annual profits (alternatively, gross sales or some other basis); this percentage changes with these levels. For example, a company may choose to share 4 percent of the first $10 million of profits and 7 percent of the profits in excess of that level.

Graduated First Dollar of Profits Formula

In profit-sharing plans, uses a specific percentage based on either pretax or after-tax annual profits (alternatively, gross sales or some other basis); this percentage changes with these levels. For example, a company may choose to share 4 percent of the first $10 million of profits and 7 percent of the profits in excess of that level.

Fixed First Dollar of Profits Formula

In profit-sharing plans, uses a specific percentage of either pretax or after-tax annual profits (alternatively, gross sales or some other basis), contingent upon the successful attainment of a company goal.

Qualified Preretirement Survivor Annuity (QPSA)

In qualified plans, provides payments for the life of the participant's surviving spouse if the participant dies before he or she has begun to receive retirement benefits.

Flat Benefit Formula

In retirement plans, designates either a flat dollar amount per employee or dollar amount based on an employee's compensation. Annual benefits are usually expressed as a percentage of final average wage or salary.

Flat Benefit Formula

In retirement plans, it designates either a flat dollar amount per employee (flat amount formula) or dollar amount based on an employee's compensation (flat percentage formula). Annual benefits are usually expressed as a percentage of final average wage or salary.

Coverage Requirements

Limit an employer's freedom to exclude employees from qualified plans. Tests to determine whether coverage requirements are met include the ratio percentage test and the average benefit test.

Retirement benefits are generally distributed in one of these three ways.

Lump sums, annuities, periodic payments

Savings Incentive Match Plans for Employees (SIMPLEs)

May be the basis for individual retirement accounts or Section 401(k) plans in small companies

Profit-Sharing Pool

Money earmarked for distribution to employees who participate in profit- sharing plans. Companies may choose to fund profit-sharing plans based on gross sales revenue or some basis other than profits.

Matching Contributions

Money the employer deposits into an employee's defined contribution account contingent on the employee making contributions first.

Marilyn turned 70.5 in 2019. She is retired and has a qualified retirement plan. Which of the following statements is true? I. She must make her initial RMD by April 1, 2020. II. She must make her RMD for 2020 by December 31, 2020.

Neither I nor II

Section 457 Plans

Nonqualified retirement plans typically for local or state government employees.

Backloading

Occurs whenever benefits accrue at a substantially higher rate during the years close to an employee's eligibility to earn retirement benefits. The Internal Revenue Service discourages backloading; employers must follow one of three rules to ensure regular accumulation of retirement benefits; three percent rule, 133 1/3 percent rule, or fractional rule.

Distribution

Payment of vested benefits to participants or beneficiaries.

Qualified Domestic Relations Order (QDRO)

Permit a retirement plan to divide a participant's benefits in the event of divorce. Dividing a participant's benefits without it is a violation of ERISA and the IRC.

Salary Reduction Agreements

Permit an employer to defer a specified amount of pay, often expressed as a percentage of pay, into the employee's defined contribution retirement account each pay period.

401(k) Plan

Permit employees to defer part of their compensation to an individual account set up in the qualified defined contribution plan; only private-sector or tax-exempt employers are eligible to sponsor 401(k) plans. Named after the section of the Internal Revenue Code that created them, also known as cash or deferred arrangements (CODAs).

Pooled Employer Plans (PEPs)

Plans established under the SECURE Act that permit unrelated employers to join and participate in a single retirement plan. Unrelated employers operate in different industries or in different geographic regions

Profit-Sharing Plan

Plans to distribute a portion of profits to employees

Nondiscrimination Rules

Prohibit employers from favoring highly compensated employees in making contributions or benefits, availability of benefits, rights, or plan features.

Termination Insurance

Protects against the loss of vested pension benefits when plans fail. Employers with eligible defined benefit pension plans must purchase this.

Employee Stock Option Plans (ESOPs)

Provide shares of company stock to employees. It can be thought of as stock bonus plans that use borrowed funds to purchase the stock

Which of the following statements about the distribution of funds from a qualified retirement account is true?

Qualified distributions taken before the age of 59.5 are subject to a 10% additional tax unless they are withdrawn because of specified circumstances such as death or long-term disability.

Unit Benefit Formula

Recognize length of service in retirement plans. Typically, employers decide to contribute a specified dollar amount per years worked by an employee. Alternatively, they may choose to contribute a specified percentage amount per years of service.

Defined Contribution Plan

Require employers and employees to make annual contributions to separate retirement fund accounts established for each participating employee, based on a formula contained in the plan document.

Lump Sum Distributions

Single payments of benefits. In defined contribution plans, equals the vested amount (sum of all employee and vested employer contributions, and interest on this sum).

Lump Sum Distributions

Single payments of benefits. In defined contribution plans, lump sum distributions equal the vested amount (sum of all employee and vested employer contributions, and interest on this sum)

There are three possible contribution sources for defined contribution plans. Which of the following is not one of those sources?

Social Security Integration

Wearaway

Some (usually older) employees do not accrue benefits for a period of time following conversion of a defined benefit plan to a cash balance plan, while other (usually younger) employees do not experience an interruption in accruing benefits

Plan Termination Rules

Specifications set forth by the Pension Benefit & Guaranty Corporation regarding the discontinuation of an employer's defined benefit pension plan.

Accrual Rule

Specify the rate at which participants accumulate (or earn) retirement benefits.

Accrual Rules

Specify the rate at which participants accumulate (or earn) retirement benefits.

Annual Addition

The annual maximum allowable contribution to a participant's account in a defined contribution plan, including employer contributions allocated to the participant's account, employee contributions, and forfeitures allocated to the participant's account.

Vesting refers to

The employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.

Golden Handcuffs

The idea that defined benefit pension plans provide strong financial incentive for employees to build seniority because pension income is more generous for these individuals (compared to those who leave the company after a few years).

Accumulated Benefit Obligation

The present value of benefits based on a designated date. Actuaries determine a defined benefit plan's accumulated benefit obligation by making assumptions about the return on investment of assets and characteristics of the participants and their beneficiaries, including expected length of service and life expectancies.

Forfeitures come from the accounts of employees who terminate their employment prior to earning vesting rights. True or False?

True

Hardship distributions were allowed in qualified retirement plans before the SECURE Act. True or False?

True

Taxable distributions taken from qualified retirement accounts after January 1, 2020 and received after retirement are subject to ordinary income tax rates. True or False?

True

The SECURE Act will require plan sponsors to annually disclose on 401(k) statements an estimate of the monthly payments participants would receive if their total account balance were used to purchase an annuity for the participant and the participant's surviving spouse. True or False?

True

Rita went to work for a manufacturing company. The company offers a defined-benefit pension plan. The benefit at retirement is equal to 1.5 percent multiplied by years of service with the company, with the result multiplied by average salary in the three highest consecutive years of paid employment with the company. The benefit formula used at Rita's company is a

Unit-Benefit Formula

Graduated First-Dollar-of-Profits Formula

Uses a different percentage based on level of attained profits.

Fixed First-Dollar-of-Profits Formula

Uses a specific percentage of either pretax or after-tax annual profits, contingent upon the successful attainment of a company goal