Life Insurance Lesson 11
College savings plans
Allow contributions to be invested with after-tax dollars to allow for a positive return upon time for distribution.
Prepaid tuition plans
Allows future tuition to be paid for a certain amount of time at current tuition costs.
Money-Purchase Pension Plan
Also known as an 'individual account' plan, this type of defined contribution plan requires the employer to deposit a fixed monetary contribution into an employee's pension fund, instead of sharing in company profits or issuing shares of the company's stock. In comparison to profit sharing and issuing company stock to employees who are tied to company performance, through a money-purchase pension plan, less risk is associated with the employee since the employer is required to contribute a predetermined amount of funds annually, regardless of the company's performance. At retirement, this type of plan provides employees with the option to choose any benefits that may be purchased with the funds available in the employee's account, including stock, or simply as a monetary payout.
Salary Reduction SEP Plan (SARSEP)
Although establishing new SARSEP plans have been prohibited since 1996, any plans established before 1997 are allowed by the IRS to continue as retirement plans under current tax codes. This type of salary reduced SEP was reserved for small business owners consisting of 25 or fewer employees. SARSEPs were a more simplified version of a 401(k) plan which incorporated a salary reduction approach in which employees elected to have a portion of their pay directed into the SEP's IRA fund. The employee can elect to have employer contributions added to their SEP or paid to them as wages, limited to 16,50
Defined Benefit Plans
Defined benefit plans guarantee, as specified in an employee's contract, the amount of benefit or percentage of employment income that he or she will receive once pension benefits are payable at retirement. The specified monthly benefit amount is expressed as either a fixed dollar amount or a percentage of the employee's pre-retirement earnings that are payable to the retired employee for a specified period of time or for the remainder of his or her life.
Defined Contribution Plans
Defined contribution plans focus on the contributions paid into the plan instead of the benefits distributed out of the fund. Both the employer and employee deposit fixed contributions into the employee's pension account. The funds are then invested on the employee's behalf, and all contributions invested, plus interest and possible dividends earned, will represent the total accumulation of funds available at the time of his or her retirement.
In order to receive these tax advantages, a qualified plan must provide the following:
Disclosure of the investment's performance to all participants Allow participation of every eligible employee into the plan, although not every employee is eligible to participate in a retirement plan Provide vesting rights to the employee (immediate, cliff or graded) Retirement benefits must be equally provided to all qualified participants, regardless of income levels
Simplified Employee Pension Plan (SEP)
Essentially, this plan sets up an individual retirement account (IRA) to which an employer contributes funds on a tax deductible basis. As with a money-purchase plan, SEPs do not require employers to make annual contributions, but do require contributions to be made on a continual basis. Employees are fully vested in employer contributions immediately upon beginning the plan. Once funds are contributed to the employee's account, they become nonforfeitable to the employee. SEP plans were created to overcome the usual costs associated with establishing qualified plans **Basically an IRA, owned by an employee, which will accept empoyer contributions on behalf of employe
Profit Sharing and Stock Bonus Pension Plans
Many companies have created employee ownership retirement programs in which employee retirement benefits are dependent on the performance of the company. Retirement benefits are often paid out to the retiree as shared profits or through company stock and provide companies with some flexibility in making contributions to the employee's pension fund. employers are not required to contribute to such plans every year provides retirees with the potential for a larger retirement income payment based on a company's financial strength.
Types of Defined Contribution Plans
Profit Sharing and Stock Bonus Plans Employee Stock Ownership Plans (ESOP) Money-Purchase Pension Plans 401(k) Plans Thrift Savings Plans (TSP) 403(b) Plans Simplified Employee Pensions (SEP) Salary Reduction SEP Plans (SARSEP) SIMPLE Plans Keogh Plans (HR-10s) IRAs and Roth IRAs
Thrift Savings Plan (TSP)
TSPs are retirement plans enacted by Congress to provide retirement pension for federal civil service employees and members of the armed forces. Similar to a 401(k), this defined contribution tax deferred retirement plan allows TSP contributions to be deducted from income with matching contributions from the employer up to 5% of the employees annual income. As a qualified plan, these funds earn interest tax-free until withdrawal at retirement.
Individual Retirement Accounts
While the bank or other financial institution acts as the 'trustee' of the account, investment decisions are made by the owner of the retirement account.
Pension Benefit Guaranty Corporation (PBGC)
a federal organization that was created under ERISA to guarantee payments of pension benefits in 'defined benefit' plans that terminate due to a lack of funding to cover benefit payments. Defined benefit plans are designed to pay a predetermined benefit amount to recipients upon retirement. Considered to be a type of insurance, employers and plan administrators pay the PBGC insurance premiums to maintain financial protection against insolvency of their retirement funds.
Qualified Plan
a type of retirement plan designed to provide certain tax benefits such as tax-free contributions by employees, tax-deducted contributions by employers and tax-deferred earnings growth to allow for greater earning on the investment.
Nonqualified Plan
a type of retirement plan that does not meet IRS guidelines to receive tax advantages. Contributions and benefits are taxable as ordinary income when contributed or received by the retiree and cannot be deducted when contributed by the employer. Typically, nonqualified plans are restricted to top executives and key people within a company's leadership structure and include deferred compensation and bonus plans in addition to retirement pension. **A type of benefit plan that may discriminate, is not required to be filed with the IRS, and does not provide a current tax deduction for contributions.
Immediate Vesting
allow their employees to gain immediate ownership of employer contributions.
Section 457 Deferred Compensation Plan
allows employees of state and local governments, as well as for employees of nonprofit organizations, the ability to defer compensation similar to a 401(k) or 403(b) plan. Plan contributions and earning are not included in gross income and grow on a tax-deferred basis until the funds become available upon retirement. - the employee can make more frequent deferments within the last 3 years of his or her employment before retirement.
Pension Plans
company plans that provide retirement income for their workers
Graded Vesting
occurs over a number of years where a larger percentage of ownership is gradually transferred to the employee, who eventually gains ownership of 100% of the employer's contributions.
Cliff Vesting
occurs when an employer requires a certain number of years of plan accumulation and then provides 100% vesting to the employee.
(SIMPLE) IRA and 401(k)
plan is marketed towards small businesses with fewer than 100 employees, as well as tax-exempt companies and government. SIMPLE plans are beneficial to smaller employers because they are less restrictive in establishing a plan and require less administrative costs and plan maintenance than other retirement plans. Funded through either an IRA or 401(k) plan, both the employee and employer contribute tax deductible funds to the employee's retirement plan. Employers can implement one of two methods in making required annual contributions. The first method is to 'match' each employee's contribution up to 3%. The second method is to make a flat 2% contribution to all employees, regardless of employee contributions. Under a SIMPLE IRA or SIMPLE 401(k), an employee is fully vested in employer contributions immediately upon beginning the plan. Once funds are contributed to the employee's account, they become nonforfeitable to the employee.
403(b) Plan/ Tax-Sheltered Annuity (TSA)
provided to eligible employees of the public schools system and certain non-profit organizations that are considered to be 'tax-exempt' organizations. Similar to a 401(k) plan: TSA funds contributed by an employer and employee are excluded from an employee's current taxable income, and earnings grow tax-deferred until the employee retires and begins to withdraw funds from the plan.
Self-Employed 'Keogh' (H.R. 10) Plans
retirement plan for self-employed people that allows them to save up to a maximum of 15% of income and deduct it from their taxable income, type of time deposit
Vesting Schedule
the time period in which an employer sets up for employees to gain ownership over employer contributions that are deposited to the employee's qualified retirement account. an employer's vesting schedule depends on the number of years of employment, or Years of Service to the employer, that are required by the employee before he or she gains ownership of the employers retirement contributions.
Section 529 Plans/Qualified Tuition Programs (QTPs)
these plans are designed to save for college tuition as well as receive tax credits and deductions towards college expenses., Prepaid tuition plans for state residents allow resident donors to lock in current tuition rates by paying now for future education cost
Employee Stock Ownership Plan (ESOP)
ype of defined contribution plan that is invested primarily in employer stock in which qualified employees receive ownership upon retirement. Although similar in principle to stock bonus plans, benefits provided to the employee from stock ownership plans are dispersed in the form of company stock, instead of a monetary pension payout.
