CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Module 3
Fundamentals of Defined
Contribution Plans
©2013, College for Financial Planning, all rights reserved.
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-2
Questions to Get Us Warmed Up
3-3
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-4
Qualified & Nonqualified Plans
Qualified Plans
Nonqualified Plans
Pension Plans
Profit Sharing
Plans (DC)
Tax-Advantaged
Plans
Other Nonqualified
Plans
Defined Benefit (DB)
Profit Sharing
Traditional IRA
Section 457 Plans
Cash Balance (DB)
Thrift Plan
Roth IRA
Stock Bonus
SIMPLE IRA
ISO
Money Purchase (DC)
ESOP (LESOP)
SEP
ESPP
Target Benefit (DC)
Age-Weighted
(SARSEP)
NQSO
403(b) (TSA)
Deferred
Compensation Plans
Cross-Tested
(Comparability)
401(k) Plan
SIMPLE 401(k)
3-5
Profit Sharing & Pension Plans
Qualified Plans
Profit Sharing
Plans
Pension Plans
Money Purchase
Plans
Defined Benefit
Plans
Age-weighted MP
Plans or Target
Plans
Cash Balance
Plans
3-6
Annual Addition Limits
• Annual additions are comprised of
•
o employer contributions
o employee contributions
o forfeitures
IRC Section 415(c) limit on “annual additions”
is the lesser of
o 100% of compensation, or
o $51,000 (2013)
3-7
Contribution Limits
• Employer deduction limit:
•
•
25% of payroll (does not
include employee
deferral amounts)
Combined employee and
employer contribution
limit: $51,000 (2013) or
100% of compensation
Maximum includible
compensation:
$255,000 (2013)
3-8
Money Purchase Plan
• Employer contributions are up to 25% of
•
•
covered payroll.
Forfeitures may be reallocated to remaining
participants’ accounts or applied to reduce
employer contributions.
It is subject to minimum
funding standard;
contributions are
mandatory.
3-9
Safe Harbor Money Purchase Plan for Leasing Organizations
• Generally applies to leased employees working
full-time for at least one year with one
employer; they should participate in the
employer’s retirement plan unless the leasing
organization has a safe harbor money
purchase plan that provides
o 10% of compensation contribution
(minimum),
o immediate participation, and
o immediate vesting
3-10
Survivor Annuities
Money purchase plans,
as is the case with all
four pension plans,
must provide survivor
annuities (these were
covered with defined
benefit plans):
o QJSA
o QOSA
o QPSA
3-11
Target Benefit Plan
• Employer contributions are up to 25% of
•
•
covered payroll; age-weighted contributions.
Forfeitures may be reallocated to remaining
participants’ accounts or applied to reduce
employer contributions.
It is subject to minimum funding standard;
contributions are mandatory.
3-12
Target Benefit Plans
Provisions Shared with
Defined Contribution Plans
• Maximum annual additions to a
participant’s account are
limited to the lesser of 100% of
compensation or $51,000.
• Retirement benefit is
determined by account
balance.
• Employee assumes investment
risk.
• There is no annual actuarial
determination.
• Forfeitures may be reallocated
or used to reduce employer
contribution.
Provisions Shared with
Defined Benefit Plans
• Plan generally benefits older
employees.
• Actuary determines initial
contribution level and formula
for allocating contributions.
• There are mandatory annual
contributions.
3-13
Pension Plans & Profit Sharing Plans
Mandatory funding?
Employer stock
limitation?
Survivor annuities?
In-service
withdrawals
allowed?
Pension Plans
Profit Sharing
Yes
No
Yes, no more
than 10%
Yes
No, unless age
62 or older if
plan allows
No, up to 100% can
be in employer stock
No
Yes, after two years if
the plan allows
3-14
Types of Profit Sharing Plans
•
•
•
•
•
•
•
profit sharing
thrift (allows after-tax employee deferrals)
stock bonus
ESOP or LESOP
age weighted
cross-tested
401(k) (allows pre-tax
employee deferrals, will
be covered in the next module)
3-15
Profit Sharing Plans
Basic Provisions
• 25% employer deduction limit
• Employer contributions usually are discretionary, but must be
“substantial and recurring”
• Forfeitures usually are reallocated to remaining participants’
accounts
Advantages
Employer
No fixed annual contribution required
may motivate employees if based on
profits
Younger participants benefit from
many years of tax-deferred
Participant
contributions, compounding earnings,
and forfeiture reallocations
Disadvantages
Plan may benefit younger participants
when the goal is to benefit older owner
Employer is not required to contribute
annually
4-16
Vesting & Top Heavy Plans
• Maximum vesting schedule for profit sharing
•
plans is either 3-year cliff or 2- to 6-year graded
(since PPA)
If plan is top heavy (more than 60% of the sum
of account balances are for key employees),
then non-key participants must receive a
contribution of at least 3% of compensation (or
less if the key employees are also receiving
less)
3-17
Key Employee (for Top Heavy Testing)
• a “5% owner”
•
•
(ownership of >5%), or
owned >1% of the
company and received
compensation
>$150,000, or
was an officer of the
company and received
compensation
>$165,000 (2013)
3-18
Profit Sharing Plan Withdrawals
In-service distributions
• hardship withdrawals
• non-hardship withdrawals
o cannot exceed vested
amount
o must have been a
participant for at least
two years
• subject to early withdrawal
penalty
Loans
• subject to special rules
including loan limits
3-19
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-20
Stock Bonus Plans
Basic Provisions
• Same provisions as profit sharing plans, except
contribution is in employer stock
Advantages
Employer
Cashless contributions aid cash flow
Participant
Allows participants to share in company ownership.
Tax is deferred on appreciated stock until sale (“net
unrealized appreciation”). May direct investment of
assets invested in employer securities into other
suitable investments.
Disadvantages
Voting rights must be passed on to participants.
Employees who meet certain requirements have the
right to direct that assets invested in employer
securities be reinvested in other suitable
investments.
4-21
Stock Bonus Plan Diversification Rules for Publicly Traded Companies
• Employee deferral amounts must be allowed to invest in
•
•
alternative investments (other than the employer’s
stock) immediately.
After three years of service, employees must be
permitted to direct account balances attributable to
employer contributions into alternative investments.
These rules came about after Enron and Worldcom,
over concern about employees having too much of their
retirement money concentrated
in company stock.
3-22
Net Unrealized Appreciation (NUA)
• NUA treatment is available for any employer
•
•
stock distributed from a qualified plan
Stock bonus, ESOPs, 401(k) profit sharing, are
all qualified plans, so the NUA rules would apply
An advantage of NUA is that
it is taxed as a long-term
capital gain, not as
ordinary income
3-23
NUA Example
Josephine, age 53, takes a distribution on March 1,
2013, of 3,000 shares of company stock. Her cost basis
is $65,000 (the amount of employer contributions) and
the stock is worth $255,000 when distributed. She sells
all 3,000 shares on July 15, 2013, for $270,000.
Ramifications are:
o $65,000 taxed as ordinary income, and subject to
10% penalty tax
o $190,000 NUA taxed as a long-term capital gain
o $15,000 additional gain taxed as
a short-term capital gain (if held
for more than one year from
distribution date, then any
additional gain would be long-term)
3-24
NUA Example
401(k) account balance
$300,000
Company stock ($10,000 basis) taken as a taxable
distribution in kind1
$100,000
Other assets rolled over to Traditional IRA
$200,000
Taxed as ordinary income when received
$10,000
Taxed as long-term capital gains when stock is sold
$90,000
Taxed as ordinary income when withdrawn from
IRA2
1
2
$200,000
Does not consider the possibility of early distribution penalties.
Assumes no increase in value.
3-25
NUA Tax Implications
Income Tax Bracket1
Value
25%
35%
Tax on company cost basis
$10,000
$2,500
$3,500
Tax on NUA Gain2 (15%)
$90,000
$13,500
$13,500
$200,000
$50,000
$70,000
$66,000
$87,000
$75,000
$105,000
$9,000
$18,000
Tax on IRA Rollover when withdrawn3
Total Income Tax
Tax when withdrawn if entire amount rolled
over to an IRA
$300,000
NUA income tax savings
1
2
3
State and local income taxes are not considered.
Assumes securities are sold at the distribution price
Assumes no increase in value.
3-26
Employee Stock Ownership Plan (ESOP)
Basic Provisions
• Primary purpose of ESOP is to invest in qualifying employer
securities.
• Contributions of up to 25% of payroll may be used to buy
securities for plan.
• There are diversification requirements for older participants.
Advantages
Employer
Cashless contributions aid cash flow.
Leverage used to buy employer stock.
Deductions on loan to purchase stock: 25% for loan
principal repayment, unlimited interest expense for
C corporations. Interest is part of 25% contribution
limit for S corporations.
Participant
Allows participants to share in company ownership.
Tax is deferred on appreciated stock until sale.
Disadvantages
Plan cannot be integrated with Social Security.
Participant can elect distribution in cash at fair
market value.
4-27
Mechanics of ESOPs
Employer
Plan Contribution $
ESOP
Allocation of
Employer
Securities
Stock Purchase $
Employer Securities
Owner
Owner
Participant’s
Account
3-28
Mechanics of LESOPs
Interest
Bank
Principal
Repayment $
Employer
Plan Contribution $
ESOP
Loan $
Stock Purchase $
Employer
Securities
(allocated as loan is
paid down)
Employer Securities
Owner
Owner
Participant’s
Account
3-29
ESOP Diversification Requirements
These requirements apply to ESOPs that are
entirely employer funded (which most are).
• A participant who has
o attained age 55, and
o has at least 10 years of participation in
the plan,
• must be permitted to diversify up to 25% into other
assets, and as much as
50% into other assets in
the final year before
normal retirement age
as determined by the
plan document.
3-30
Stock Bonus & ESOPs Compared
Stock Bonus
ESOP
Law requires to invest
primarily in employer
securities
No
Yes
Borrowing allowed to
acquire securities
No
Yes
Social Security
integration allowed
Yes
No
NUA treatment allowed
Yes
Yes
Diversification
requirement for
employer contributions
If company is publicly traded,
after 3 years of service
employee must be permitted
to diversify entirely out of
company stock into qualified
alternative investments.
Upon attaining age 55 and
having at least 10 years of
service, employee must be
allowed to begin diversifying
out of company stock (up to
25% initially).
3-31
Age-Weighted Profit Sharing Plan
•
•
•
Uses a combination of age and
compensation as the basis for
allocating contributions to the
participants’ accounts.
Appropriate when owners or key
employees are older than most
other employees and company
wants contribution to favor them.
Based on theory of “comparable
benefits” at retirement age
o Employees closer to retirement
require higher contributions to
obtain comparable retirement
benefits
3-32
Age-Weighted Profit Sharing Plan
Benefit Valuation Allocation Example
Employer Contribution to
Age-Weighted Profit
Sharing Plan
(A)
Age
(B)
Annual Pay
(C)
Annual
Value
of 1%
Annuity
Abe
50
$150,000
$1,500
$15,402
$4,530
70%
$23,450
16%
Betty
40
$100,000
$1,000
$10,268
$1,336
21%
$7,035
7%
Doris
35
$40,000
$400
$4,107
$355
5%
$1,675
4%
Ed
30
$30,000
$300
$3,080
$177
3%
$1,005
3%
Hilda
26
$15,000
$150
$1,540
$64
1%
$335
2%
$6,462
100%
$33,500
Participant
Total
$335,0000
(D)
Age 65 PV of
a 1%
Annuity*
(E)
PV Benefit
Today
(F)
% of
Total
Cont.
(E÷ E)
(G)
Amount
(Fx33,500)
(H)
% of
Pay
(G÷B)
*Assuming 20-year life expectancy and 8.5% discount rate. (The IRC regs specify that a rate between 7.5%
and 8.5% must be used.)
3-33
Cross-Tested Profit Sharing Plans
• In cross-tested (new comparability) plans, eligible
•
participants are placed into one of several employee
classes based on a number of characteristics such as
o compensation,
o years of service,
o job type, and
o department.
By structuring the plan around these employee
classes, the business can allocate a large portion
of the plan contribution to
select employee groups.
3-34
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-35
Cross-Tested Profit Sharing Plans
The regulations allow disproportionate allocations
to a select class provided:
• the nondiscrimination cross-testing is passed, and
• a minimum contribution (called a “gateway
contribution”) is made in the amount of either:
o a 5% allocation for all eligible non-highly
compensated employees, or
o a lesser amount as long as the highest allocation
any highly compensated employee receives is no
more than three
times the lowest non-highly
compensated employee’s
allocation.
3-36
Cross-Tested Profit Sharing Plan Example
(D)
% of
Total
Contrib.
(H)
% of Pay
(C÷B)
(A)
Age
(B)
Annual
Pay
Group
(C)
Amount
Contrib.
Abe
50
$150,000
A
$44,000
83%
29%
Betty
40
100,000
B
5,000
9%
5%
Doris
35
40,000
B
2,000
4%
5%
Ed
30
30,000
B
1,500
3%
5%
Hilda
26
15,000
B
750
1%
5%
$53,250
100%
Name
Total
$335,000
3-37
Profit-Sharing Comparison
Cross-Tested
Age-Weighted
Age
Pay
Cont.
% of
Total
Abe
50
$150,000
$44,000
83%
29%
$44,000
70%
29%
Betty
40
100,000
5,000
9%
5%
13,200
21%
13.2
%
Doris
35
40,000
2,000
4%
5%
3,143
5%
5%
Ed
30
30,000
1,500
3%
5%
1,886
3%
5%
Hilda
26
15,000
750
1%
5%
629
1%
5%
$335,000
$53,250
100%
$62,857
100%
Name
Total
% of
Pay
Cont.
% of
Total
% of
Pay
3-38
Defined Contribution Hybrid Plan Comparison
Target Benefit
Age-Weighted
Profit Sharing
Cross-tested
(Comparability)
flexible funding
Contributions
mandatory
funding
flexible funding
Primarily
benefits
older
employees
older employees specific class of
employees
Unique
requirements
uses an
actuary when
first set up,
not required
thereafter
if top heavy
requires a min.
3% contribution
for all eligible
non-HCEs
requires a
“gateway”
contribution for all
eligible non-HCEs—
typically 5%
3-39
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-40
Keogh Plans—Basic Provisions
• Available only to unincorporated businesses—
•
•
sole proprietor or partnership
Takes the form of a qualified plan (defined
contribution or defined benefit).
Certain provisions for owner/employee are
unique to Keoghs:
o Owner/employee’s contribution is calculated on
net earnings.
o Lump-sum distribution treatment is not available
to owner/employee for separation from service
before age 59½—available only for death,
disability, or attainment of age 59½.
3-41
Calculation of Maximum Deduction for Keogh Plan Contribution
Step 1: Calculate self-employment tax
Schedule C net profit (business profit)
$100,000
Less 7.65% of self-employment income
($7,650)
Self-employment income subject to self-employment taxes
$92,350
Times 15.3% equals self-employment tax
$14,129.55
3-42
Calculation of Maximum Deduction for Keogh Plan Contribution
Step 2: Determine adjusted contribution
percentage for owner
Percentage contribution for employee participants
(employee percentage)
Divide by 1 plus employee percentage
Equals adjusted contribution percentage for owner
.25
1.25
.20
3-43
Calculation of Maximum Deduction for Keogh Plan Contribution
Step 3: Multiply net earnings by adjusted
contribution percentage
Schedule C net profit
$100,000
Less income tax deduction (1/2 self-employment
tax)
$7,064.78
Net earnings
Times contribution percentage for owner
Owner’s contribution for his own benefit
$92,935.23
.20
$18,587.05
3-44
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-45
Permitted Disparity (Social Security Integration) in a Defined Contribution Plan
Amount Contributed
$7,000
$6,000
Additional contribution to
integrated retirement plan
5.7% FICA contribution to Old Age
portion of OASDI
$5,000
Integration allows employer to
contribute extra amounts to the
qualified plan for compensation
above the integration level,
replacing what the employer
contributes below the Social
Security wage base.
$4,000
$3,000
$2,000
5.7% of Social Security tax
$1,000
Employer’s contribution to old age portion of FICA is zero for
compensation above the wage base.
$0
Increasing annual income
3-46
Basic Features of Permitted Disparity for Defined Contribution Plans
• Maximum integration level: The Social Security
taxable wage base
• Base contribution percentage: The rate of
contribution for compensation below integration
level
• Maximum permitted disparity: The lesser of 5.7%
or base contribution percentage
• Formula:
Base contribution %  permitted disparity  excesscontribution %
• Compensation: Total compensation, up to $255,000
(2013)
3-47
Non-Integrated DC Plan Example
Employer Contribution to FICA and MPP
as a Percentage of Salary
(employer FICA contribution + employer MPP contribution) ÷ comp.
2013 Compensation:
$130,000
(6,481 + 13,000) ÷ 130,000 = 14.99%
$120,000
(6,481 + 12,000) ÷ 120,000 = 15.4%
$113,700
(6,481 + 11,370) ÷ 113,700 = 15.7%
$100,000
(5,700 + 10,000) ÷ 106,800 = 15.7%
$90,000
(5,130 + 9,000) ÷ 90,000 = 15.7%
$80,000
(4,560 + 8,000) ÷ 80,000 = 15.7%
$60,000
(3,240 + 6,000) ÷ 60,000 = 15.7%
$50,000
(2,850 + 5,000) ÷ 50,000 = 15.7%
$40,000
(2,280 + 4,000) ÷ 40,000 = 15.7%
$30,000
(1,710 + 3,000) ÷ 30,000 = 15.7%
3-48
Integrated DC Plan Example
2013 Employer Contribution to FICA and MPP as a Percentage of
Salary
(employer FICA contribution + employer MPP contribution) ÷ comp.
$130,000
(6,481 + 13,000 + 929) ÷ 130,000 = 15.7%
$120,000
(6,481 + 12,000 + 359) ÷ 120,000 = 15.7%
$113,700
(6,481 + 11,370) ÷ 113,700 = 15.7%
$100,000
(5,700 + 10,000) ÷ 100,000 = 15.7%
$90,000
(5,130 + 9,000) ÷ 90,000 = 15.7%
$80,000
(4,560 + 8,000) ÷ 80,000 = 15.7%
$60,000
(3,240 + 6,000) ÷ 60,000 = 15.7%
$50,000
(2,850 + 5,000) ÷ 50,000 = 15.7%
$40,000
(2,280 + 4,000) ÷ 40,000 = 15.7%
$30,000
(1,710 + 3,000) ÷ 30,000 = 15.7%
$20,000
(1,140 + 2,000) ÷ 20,000 = 15.7%
$10,000
(570 + 1,000) ÷ 10,000 = 15.7%
3-49
Learning Objectives
3–1
3–2
3–3
3–4
3–5
3–6
3–7
3–8
3–9
3–10
3–11
Describe the basic characteristics of defined contribution plans.
Describe the basic characteristics of money purchase plans.
Describe the basic characteristics of target benefit plans.
Describe the basic characteristics of profit sharing plans.
Describe the basic characteristics of stock bonus plans.
Describe the basic characteristics of employee stock ownership plans
(ESOPs).
Describe the basic characteristics of age-weighted profit sharing
plans.
Describe the basic characteristics of cross-tested profit sharing plans.
Describe the basic characteristics of a Keogh plan, and calculate the
owner’s contribution amount.
Evaluate a situation to recommend whether integration is appropriate
in the design of a qualified retirement plan.
Describe similarities and differences among defined contribution
retirement plans.
3-50
Defined Contribution Retirement Benefits
Limits on
Employer
Contribution
Limits on
Employee
Deferrals
Allocation of
Employer’s
Contributions
Administrative
Costs/Burden
Target
Benefit
25% deduction
limit—subject to
minimum funding
standard
Not available
Age weighted
Actuary first year
Money
Purchase
25% deduction
limit—subject to
minimum funding
standard
Not available
Fixed
contributions,
can be integrated
with Social
Security
Relatively low
Profit
Sharing
25% deduction
limit
401(k)—
(indexed)
$17,500 plus
catch-up if
eligible
Plan formula may
use salary or
service; can
be age weighted
or include
integration
with Social
Security
Relatively low —
employer
contributions must be
“substantial and
recurring,” but
employer has flexibility
with annual
contributions
Type of
Plan
3-51
Multiple Choice Question 1
Match each item in the left-hand column with the
appropriate item in the right-hand column
Characteristics of Employer
Contributions
A. Mandatory, uniform percentage of pay
B. Mandatory, age-weighted allocation
C. Cashless
D. Requires a gateway contribution
E. “Substantial and recurring”
Retirement Plans
_____Profit Sharing Plan
_____Cross-tested
_____Money purchase plan
_____Stock bonus plan
_____Target benefit plan
3-52
Multiple Choice Question 2
Which one of the following is not a
characteristic of a target benefit plan?
a. The retirement benefit is not certain;
investment risk is borne by the participant.
b. Annual additions are limited to the lesser of
100% of compensation or $51,000 in 2013.
c. Forfeitures may be applied to reduce the
employer’s contribution, or they may
reallocated to remaining participants.
d. The plan requires annual actuarial
determination.
3-53
Multiple Choice Question 3
Which of the following plans are subject to a
25% limit on deductible employer contributions?
I. money purchase plans
II. profit sharing plans
III. target benefit plans
IV. tandem (paired) plans
a. I and IV only
b. II and III only
c. I, III, and IV only
d. I, II, III, and IV
3-54
Multiple Choice Question 4
Which of the following statements are correct
descriptions of qualified plans?
I. A target benefit plan is basically an ageweighted money purchase plan.
II. A target benefit plan is a defined benefit plan.
III. A money purchase plan is a pension plan.
IV. A profit sharing plan is a flexible contribution
plan.
a. I and IV only
b. II and IV only
c. I, III, and IV only
d. II, III, and IV only
3-55
Multiple Choice Question 5
The employer contribution to GHI Corporation’s money purchase plan is
stated to be 4.5% of compensation up to the integration level.
Which of the following statements are correct?
I.
The integration level is a plan-specified dollar amount up to the Social
Security wage base.
II. The maximum percentage contribution that GHI can make for
compensation in excess of the plan’s integration level is 9%.
III. The maximum percentage contribution that GHI can make for
compensation in excess of the plan’s integration level is 10.2%.
IV. The plan’s permitted disparity is 4.5%.
V. The plan’s permitted disparity is 5.7%.
a. II only
b. I and V only
c. II and IV only
d. I, II, and IV only
e. I, III, and V only
3-56
Multiple Choice Question 6
Which of the following statements correctly describe permitted
disparity rules (Social Security integration) for qualified plans?
I. Offset integration may be used only in a defined benefit
plan.
II. Integration allows the owner of a business to skew plan
contributions or benefits in favor of highly paid employees.
III. In integrated defined contribution plans, the excess
contribution percentage is the difference between the base
contribution percentage and the permitted disparity.
IV. In offset integration, a participant’s qualified plan benefit
may not be reduced by more than 50%.
a. I only
b. II and III only
c. II and IV only
d. I, II, and IV only
e. II, III, and IV only
3-57
Multiple Choice Question 7
XYZ Company contributes 3% to a money purchase plan for eligible
employees. The owner plans to use permitted disparity (Social Security
integration) to increase contributions for higher-paid employees.
Which of the following statements is (are) correct regarding this money
purchase plan?
I. The maximum percentage contribution that XYZ can make for
compensation in excess of the plan’s integration level is 3%.
II. The maximum percentage contribution that XYZ can make for
compensation in excess of the plan’s integration level is 6%.
III. The maximum percentage contribution that XYZ can make for
compensation in excess of the plan’s integration level is 8.7%.
IV. The plan’s permitted disparity is 3%.
V. The plan’s permitted disparity is 5.7%.
a. II only
b. I and V only
c. II and IV only
d. III and IV only
e. III and V only
3-58
Multiple Choice Question 8
Which of the following are characteristics of an age-weighted profit
sharing plan?
I. An age-weighted allocation formula permits contributions to
favor older employees rather than younger employees because
the younger employees have more time to accumulate
contributions and earnings in their accounts.
II. An age-weighted allocation formula permits contributions to
individual accounts to exceed the Section 415 limitations.
III. If an age-weighted plan becomes top heavy, the vesting
schedule would be limited to either a three-year cliff or sixyear graded schedule; the plan also must provide a minimum
contribution of 3% of pay to non-key employees.
IV. An employer that uses an age-weighted allocation formula
becomes subject to the minimum funding standards.
a. I and III only
b. II and III only
c. I, II, and III only
d. I, III, and IV only
3-59
Multiple Choice Question 9
Which one of the following objectives for
establishing a profit sharing plan would be best
met through use of an age-weighted profit
sharing plan?
a. using the plan to motivate all employees
b. believing that it is more important to
motivate employees than it is to retain them
c. maximizing contributions for older
employees
d. seeking to provide rank-and-file employees
with a solid basis for retirement income
3-60
Practice Problem
Hazel is a sole proprietor, and her company is
experiencing their best year ever so she is
going to contribute 25% into the company
profit sharing plan for her two employees. After
taking into account these contributions, her
Schedule C net profit will be $200,000.
How much can she contribute for herself into
the profit sharing plan?
3-61
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Retirement Planning & Employee Benefits
Module 3
End of Slides
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