1. Lecture 24Profit-Sharing and Similar Plans • Trends • Qualified Profit-Sharing Plans • Savings Plans • Employer Stock Plans • Stock Bonus Plan • Employee Stock Ownership Plan (ESOP) • Errors in Text - Chapter 22

2. 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 • 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

3. 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

4. Savings or Thrift Plans • Employee contributions are after-tax • Matching employer contributions • Voluntary • Nondiscrimination rules • Advantages • Tax deferred savings • Availability of funds • Disadvantages • Does not maximize tax advantage

5. Employer Stock Plans • Advantages • 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

6. 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

7. 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

8. 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