Lecture 24
Profit-Sharing and Similar Plans
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Trends
Qualified Profit-Sharing Plans
Savings Plans
Employer Stock Plans
– Stock Bonus Plan
– Employee Stock Ownership Plan (ESOP)
• Errors in Text - Chapter 22
Trends in Qualified Plans
• Most new plans are defined contribution,
rather than defined benefit
• Some employers are shifting from defined
benefit to defined contribution
• Reasons
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Less risk to employer
Recent stock market performance (since 1982)
Many employees prefer defined contribution
PBGC premium increases
• Large, unionized companies still tend to
have defined benefit plans
• Now more plans are defined contribution
but more workers covered under defined
benefit
Qualified Profit-Sharing Plans
• Eligibility
• Vesting
• Employer contributions
– Formula
– Discretionary
– Deductible amount limited to 15% total compensation
• Allocation to employee accounts
– Generally based on compensation
• Age-based allocation
– Requires cross-testing
• Forfeitures
– Can be allocated to remaining participants
• Participant directed investments
• Withdrawals and loan provisions
Savings or Thrift Plans
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Employee contributions are after-tax
Matching employer contributions
Voluntary
Nondiscrimination rules
Advantages
– Tax deferred savings
– Availability of funds
• Disadvantages
– Does not maximize tax advantage
Employer Stock Plans
• Advantages
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Deduction for noncash contributions
Creates market for employer stock
Employees gain ownership interest
Unrealized appreciation is deferred
Provides some protection against hostile take-overs
• Two types
– Stock bonus plan
– ESOP
Stock Bonus Plans
• Considered qualified defined contribution plan
• Stock allocated to each employee
• Distributions subject to restrictions
– 10% penalty if not 59 1/2, retired, disabled or dead
– Must begin within 5 years of separation or 1 year of
retirement
• Employee at risk for stock performance
Employee Stock Ownership Plan
• Three parties
– Employer
– Bank
– ESOP
• Allows company to borrow money and
repay with fully deductible payments
• Initially, additional tax benefits for funding
ESOPs
• Diversification requirement
– If 55 with 10 years of service, can select to
diversify
Errors in Chapter 22
• Page 557 - Figure 22-1
– 1st graph is Defined Benefit
• Page 560 - 4th line from bottom
– Should be “(by assuming ...”
• Page 562 - Examples
– if 10% of compensation below wage base, then can
contribute 15% (maximum) of compensation above
wage base
– if 4% of compensation below wage base, then can
contribute 8% of compensation above wage base
• Page 566 - Second paragraph from bottom
– Statement “or the insurer’s term insurance rates” should
be deleted