1. Lecture 24 Profit-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 Two types
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 th line from bottom
Should be “(by assuming ...”
Page 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 Second paragraph from bottom
Statement “or the insurer’s term insurance rates” should be deleted