Chapter 10- Death and Disability Benefits, beneficiary planning (4 questions)

why are pre-retirement death benefits are usually provided outside the qualified plan

Because there are incidental rules to ERISA plans that needs to be incidental to the purpose of the plan, but also because life insurance offers better tax benefits outside of the qualified plan. · DB can be collected income tax free · Sometimes premiums paid can sometimes be deductible to the employer if they're being made to the employee

recovering cost basis for incidental death benefits

Cash value is taxable always, but can be offset by any accumulated table 2001 amount If you are self employed or an S corporation owner, you cannot recover the cost basis and will get taxed twice

advantages of QPSAs

Competitiveness, attraction and retention of employees, ability of business owner to receives group rates, shift personal expense to company, gain favorable underwriting

Qualified Preretirement Survivor Annuity (QPSA) Defined Benefit and Defined Contribution

Defined Benefit: amount equal to 50% of qualified joint and survivor annuity paid to participant The plan can charge for this benefit (which means reducing the participant's benefit) but if it does so it must allow the participant to waive the QPSA The QPSA has to be provided to all married participants who have been married for at least one year (no one else) Defined Contribution surviving spouse must receive a life annuity based on at least 50% of the value of the vested account balance (however, it is common to provide all DC plan participants a death benefit that is the fully vested account balance)

(T/F) A qualified plan must generally contain a qualified preretirement survivor annuity for all of its participants.

FALSE only married

(T/F) From an owner-employer's perspective, there is really no reason to include a death benefit in a qualified plan.

False Small-business owners may want life insurance in a plan for a number of reasons, including administrative convenience, the ability to use tax-deferred amounts to purchase insurance, and the need for insurance for estate planning purposes.

(T/F) The qualified pre-retirement survivor annuity must be paid for by the employer for all plan participants that have been married for over a year.

False The QPSA need not be an employer paid for benefit. In fact, the employer can require employee contributions to pay for the benefit or even reduce the normal benefit in order to pay.

annual taxes will be paid on life insurance in a qualified plan based on

IRS Table 2001 rates Ex: The Table 2001 rate for a man aged 55 is $4.15 per $1,000 insurance coverage

incidental death benefits for defined contribution

TERM insurance- Aggregate premiums cannot exceed 25% of aggregate employer contributions for term insurance or variable or universal life insurance WHOLE LIFE- can't exceed 50%

IRS table used for determining the current cost of the "pure insurance" protection that is subject to taxation when life insurance is purchased in a qualified plan. It replaced the PS 58 table.

Table 2001

(T/F) A self-employed individual cannot deduct the part of his or her employer contribution that is allocable to the cost of pure insurance protection for himself or herself.

True

(T/F) Especially in larger defined-benefit plans, the employer will typically provide death benefits outside of the pension plan, and if given a choice will not provide death benefits in the plan.

True

(T/F) Most employers offer disability outside of the plan

True

(T/F) To simplify administration, the sponsor should choose a definition of disability that assigns the task of determination and verification to an outside organization.

True

(T/F) When life insurance is purchased for an individual, the current cost for pure life insurance protection must be included in taxable gross income for that year.

True

(T/F)One way qualified retirement plans can provide benefits for a disabled participant is to stipulate that service for benefit purposes continues to accrue if disability occurs.

True

incidental death benefits for defined benefit

death benefits cannot exceed 100x the monthly benefit of the plan

post retirement death benefit for qualified plans

defined contribution- Qualified Joint and Survivor Annuity (QJSA)-

(T/F) pre-retirement death benefits are usually provided inside the qualified plan

false

medium sized companies: need for insurance in qualified plans

insurance benefits are decided be competition and other market factors

small sized companies: need for insurance in qualified plans

insurance needs of the principal individuals control the death benefit design

2 sets of rules for death and disability benefits

mandatory death benefits (married participants) and incidental death benefits (when the plan purchases life insurance to create additional death benefit)

pre retirement death benefit for qualified plans

qualified pre-retirement survivor annuity (QPSA)

Qualified Joint and Survivor Annuity (QJSA)

requirement for all married spouses, standard form of payment to married participants; provides surviving spouse 50%-100% of the benefit that the participant received. Participant and spouse can consent to waiver this distribution

The definition of disability in a qualified retirement plan should match

the disability insurance definition (social security or plans definition)

profit sharing plans can elect out of the QJSA if

the plan does not allow annuity options or if the plan does not accept transfers from plans subject to the J&S requirements AND if married participant dies prior to retirement they get 100% of benefit (if you want administrative costs low, avoid this)

can trust be beneficiaries for qualified plans

yes

describe the common disability provisions found in qualified retirement plans

1. full vesting at disability (totally optional for the plan to decide) 2. payout at disability 3. providing for service

In a defined-benefit plan, if the expected monthly benefit is $1,500, then the total death benefit could be $________ or the reserve at the date of death, if greater.

150,000

The incidental-death-benefit limitations do not apply to life insurance bought with contributions made in a profit-sharing plan made more than ____ years earlier as long as in-service withdrawals are allowed.

2

If universal life insurance is used to fund the plan, the aggregate premiums paid for the policy cannot exceed ____ percent of the aggregate employer contributions.

25