Session 3 Fundamentals of Qualified Plans

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 3Fundamentals of Qualified Plans

2. Session Details

3. What Makes a Plan Qualified? • ERISA • Minimum participation and coverage requirements • Non-discriminatory • Minimum vesting requirements • Minimum funding requirements (pension plans) • Protection of assets

4. Qualified & Nonqualified Plans

5. Why install a qualified plan? • Recruit, Retain, Reward • Employer deducts contributions • Up to 25% for defined contribution • As much as needed to fund $210k benefit (2014) in defined benefit • Tax-deferred growth for employee in DC • Guaranteed benefit for employee in DB • Free money! • Protection of assets

6. Plan Features • Eligibility • Service definition • Plan formula • Participant contributions • Compensation definition • Normal retirement age • Early retirement • Investment • Vesting • Plan limitation year • Death benefits • Actuarial assumptions

7. Qualified Plan Vesting Schedules

8. Top-Heavy Plans A defined contribution plan A defined benefit plan The aggregate account balances* The present value of cumulative accrued benefits The aggregate account balances* The present value of cumulative accrued benefits Is top heavy if For key employees exceed(s) 60% of For all employees * Includes benefits derived from contributions except “deductible employee contributions”; also includes amounts distributed in current plan year due to separation and any in-service distributions in the preceding four plan years.

9. Key Employee Any employee who, at any time during the plan year containing the determination date for the plan year to be tested, met any of the following criteria: • was a “5% owner” (ownership of > 5%) • owned 1% of the company and received compensation > $150,000 • was an officer of the company and received compensation >$170,000 in 2014

10. Identify Key Employees XYZ Corporation

11. Identify Key Employees XYZ Corporation Key employees include: Kerry, Gregg, Ron, and Gina • 5% Owners: Kerry, Ron, and Gina • 1% owner and compensation > $150,000: none • Officer with compensation >$170,000 (2014): Gregg The number of officers who can be considered key employees based on their title and compensation is the greater of 10% of all employees, or 3 (but in no case more than 50).

12. Top-Heavy Plan Requirements Accelerated Vesting • 3-year cliff or 6-year graded Minimum Contributions and Benefits to be paid to Non-Key Employees • Defined Contribution Plan • Plan must provide a contribution of at least 3% of compensation per year, or, if less, the percentage contributed for key employees. • Defined Benefit Plan • Plan must provide a minimum benefit of 2% of employee’s highest 5-year average compensation for each year of service earned while plan is top-heavy, to a maximum of 20%.

13. Minimum Funding Requirements • Actual plan results are compared to estimated amount needed to provide promised plan benefit. • Minimum funding requirement: employer must contribute at least a minimum amount to fund the plan benefit. • If account value exceeds minimum required to fund benefit, contribution is decreased. • If plan is underfunded there is a 10% penalty tax.

14. Defined Benefit Plan Termination (1) Overfunded plans must either • transfer 25% of the potential reversion to a qualified replacement plan, or • increase the participants’ accrued benefits by at least 20%.

15. Defined Benefit Plan Termination (2) Underfunded plans (involves PBGC) • voluntary standard termination • voluntary distress termination • involuntary termination • maximum monthly amount guaranteed by PBGC at age 65 is $4,943paid out over participant’s lifetime; lump sum option is not available

16. DB Plans Exempt From PBGC • Plans maintained for substantial business owners only (such as sole business owners or greater than 10% business owners) • Plans maintained by professional service employers that have never had more than 25 active participants

17. PPA Disclosure Requirements • New under PPA • Disclosures include • summary of plan participants, • information about funding status of plan, and • allocation of assets • PBGC overview and what it guarantees must also be provided

18. Multiple Choice Question 1 Which of the following could be expected to reduce the annual cost of a defined benefit plan? • a high turnover assumption • use of salary scales • a high interest rate assumption • a high benefit cost assumption • a low turnover assumption • I and II only • I and III only • II and IV only • I, II, and III only • II, IV, and V only

19. Multiple Choice Question 2 Which of the following are characteristics of a voluntary standard termination? • The plan must have sufficient assets to meet benefit liabilities. • The plan has insufficient assets to meet benefit liabilities. • Plan assets must be distributed in accordance with ERISA requirements. • This type of termination would be used if the employer wanted to terminate a defined benefit plan and offer a defined contribution plan instead. • The employer is assessed a 50% penalty tax on asset reversions. • I and IV only • II and III only • I, III, and IV only • II, III, and V only • I, III, IV, and V only

20. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits Session 3End of Slides