1. 4-1

2. Employer-Sponsored Retirement Plans McGraw-Hill/Irwin Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4

3. 4-3 LEARNING OBJECTIVES Differences between qualified and non- qualified plans Defined benefit and defined contribution plan features Types of defined contribution plans Hybrid plans Integration with Social Security

4. 4-4 RETIREMENT PLANS Defined Benefits Plans Defined Contribution Plans Hybrid Plans

5. 4-5 PLAN CHARACTERISTICS Participation Requirements Coverage Requirements Vesting Rules Accrual Rules Nondiscrimination Rules Testing Key Employee & Top-Heavy Provisions

6. 4-6 PLAN CHARACTERISTICS Minimum Funding Standards Social Security Integration Contribution & Benefit Limits Plan Distribution Rules Qualified Survivor Annuities Qualified Domestic Relations Orders Termination Rules & Procedures

7. 4-7 COVERAGE TESTS Ratio Percentage –70% of Participants NOT in Highly Compensated Group Average Benefit Test –Benefit Amount is 70% of Benefit Amount for Highly - Compensated

8. 4-8 VESTING Cliff Vesting –Vested after 3 Years Service Gradual Vesting –20% a Year After Year 2

9. 4-9 SAFE HARBORS Uniform Normal Retirement Benefit Uniform Post-Normal Retirement Benefits Uniform Subsidies Uniform Vesting & Service Crediting No Employee Contributions Period of Accrual

10. 4-10 LIMITS & DEDUCTIONS Maximum Benefit –$180,000 in year 2007, or –100% Highest Average for 3 Years –$5,000 Indexed Starting 2006 Employers with Less than 101 Employees Use Different Computation Methods

11. 4-11 DEFINED CONTRIBUTION PLANS Employees & Employers Contribute Employers Invest Contributions in Stocks and Bonds No Guarantee of Benefits Amounts Possible Types –Profit - Sharing Plans –Stock Bonus Plans –Employee Stock Ownership Plans

12. 4-12 INDIVIDUAL ACCOUNTS SOURCES Employer’s Contributions a % of Salary/Wages Employee’s Contributions a % of Salary/Wages Forfeitures Return on Investments

13. 4-13 DEFINED CONTRIBUTION PLANS Section 401 (k) Profit Sharing Stock Bonus ESOPs SIMPLE Section 403 (b) Tax Deferred Annuities Section 457

14. 4-14 SECTION 401(k) PLANS Also Cash or Deferred Arrangements (CODAS) Defer Income to Defined Contribution Plan For Employees of Private Sector or Tax- Exempt Companies Investment Gains Taxed when Received

15. 4-15 PROFIT – SHARING PLANS Fixed First $ of Profits - Specific % Pre - After - Tax Annual Profits Graduated First - $ of Profits – Contributions Increase as Profits Increase Profitability Threshold – Contributions Only When Profits Fall Within Limits

16. 4-16 STOCK BONUS PLAN Invest in Company Securities Must Meet Nondiscrimination Test Employees Vote May Like Shareholders May be Basis for 401 (k)s

17. 4-17 ESOPs Similar to Stock Bonus Plans Except: –Borrowed Money to Purchase Stock –Used Money for Other Business –May be Leveraged or Nonleveraged –Company Repays ESOP to Repay Loan

18. 4-18 SIMPLE For Companies with up to 100 Employees & $5,000 in Compensation Must be Only Retirement Plan Can be IRAs or 401 (k) s Meet Nondiscrimination & Vesting Limits up to $10,000 in 2005

19. 4-19 HYBRID PLANS Combinations of Defined Benefit & Defined Contribution Plans Types –Cash Balance –Target Benefit –Money Purchase –Age Weighted Profits Sharing

20. 4-20 CASH BALANCE PLANS “Defined benefit plan that defines benefits for employee be reference to the amount of the employee’s hypothetical account balance.” – IRS Less costly Pay out a lump sum

21. 4-21 CASH BALANCE PLANS – CONTROVERSIES Age-related treatment Favorable for younger workers Some court rulings – cash balance plans do not violate ADEA

22. 4-22 CASH BALANCE PLANS – OTHER ISSUES Problems for older workers when converting from defined benefit to cash balance “Wearaway” problem – employees do not accrue benefits for a time after conversion

23. 4-23 TARGET BENEFIT PLAN Individual Accounts Total Benefits NOT Guaranteed Employers Use Actuarial Calculations Benefits Invested by Trustee Less Expensive for Employers

24. 4-24 MONEY PURCHASE PLANS Benefit Based on Account Balance at Retirement Contributions Based on Formula Contributions NOT Tied to Company’s Performance Excise Tax Penalties for Failure to Make Contributions

25. 4-25 INTEGRATION METHODS Defined Benefit Plans –Offset Approach –Excess Approach Defined Contribution Plans –Excess Approach