Profit-Sharing and Similar Plans Chapter 22

A. Money Purchase Defined Contribution Pension Plans Individual account for each employee Employer is required to to make a specific contribution each year to each employee Account balance upon retirement determines retirement benefit Retirement benefits could be either in the form of a lump sum or annuity

B.Qualified Profit-Sharing Plans A profit sharing plan is a qualified, defined contribution plan with a flexible contribution related to the employer’s profit Plan must use a nondiscriminatory formula Individual accounts Employees can contribute to the plan In-service withdrawals are allowed

Maximum employer contribution is 25% of all participants’ compensation Forfeitures: –can be used to reduce employer contributions –can be reallocated among remaining employees Participation and vesting provisions: same as other qualified plans Loans

Application: –when employer’s profits vary –an incentive feature –employees are young and willing to accept a degree of investment risk –as a supplement to an existing defined benefit

C.Age-Weighted Plans Section 401(a)(4): allows a higher contribution by employer based on employee age at plan inception or date of hire. Three different method exist –Cross-tested/new comparability plan –(Fail-safe) age weighted profit-sharing plan –Target plan

D.Employer Stock Plans 1. Stock Bonus Plans Similar to a profit sharing plan but the benefits are distributed in the form of employer stock and not cash. Employer contributes either cash or employer securities Allows employee contributions Employer contributions must be allocated to individual accounts

2. ESOP ESOPs are qualified defined contribution plans. Participants accounts are invested in stock of the employer company Employer contributions are deductible when made up to 25% of covered payroll