1. ©2015, College for Financial Planning, all rights reserved. Session 5 Fundamentals of Defined Contribution Plans CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

2. Session Details Module3 Chapter(s)1 LOs3-1 Describe the basic characteristics of defined contribution plans. 3-2 Describe the basic characteristics of money purchase plans. 3-3 Describe the basic characteristics of target benefit plans. 3-4 Describe the basic characteristics of profit sharing plans 5-2

3. Qualified & Nonqualified Plans Qualified PlansNonqualified Plans Pension Plans Profit Sharing Plans (DC) Tax-Advantaged Plans Other Nonqualified Plans Defined Benefit (DB)Profit SharingTraditional IRASection 457 Plans Cash Balance (DB)Thrift PlanRoth IRA Stock BonusSIMPLE IRAISO Money Purchase (DC)ESOP (LESOP)SEPESPP Target Benefit (DC)Age-Weighted(SARSEP)NQSO Cross-Tested (Comparability) 401(k) Plan403(b) (TSA)Deferred Compensation Plans SIMPLE 401(k) 5-3

4. Profit Sharing & Pension Plans Qualified Plans Profit Sharing Plans Pension Plans Defined Benefit Plans Cash Balance Plans Money Purchase Plans Age-weighted MP Plans or Target Plans 5-4

5. Annual Addition Limits Annual additions are comprised of o employer contributions o employee contributions o forfeitures IRC Section 415(c) limit on “annual additions” is the lesser of o 100% of compensation, or o $53,000 (2015) 5-5

6. Contribution Limits Employer deduction limit: 25% of payroll (does not include employee deferral amounts) Combined employee and employer contribution limit: $53,000 (2015) or 100% of compensation Maximum includible compensation: $265,000 (2015) 5-6

7. Pension Plans & Profit Sharing Plans Pension Plans Profit Sharing Mandatory funding?YesNo Employer stock limitation? Yes, no more than 10% No, up to 100% can be in employer stock Survivor annuities?YesNo In-service withdrawals allowed? No, unless age 62 or older if plan allows Yes, after two years if the plan allows 5-7

8. Participant Employer Advantages No fixed annual contribution required may motivate employees if based on profits Younger participants benefit from many years of tax-deferred contributions, compounding earnings, and forfeiture reallocations Disadvantages Plan may benefit younger participants when the goal is to benefit older owner Employer is not required to contribute annually Profit Sharing Plans Basic Provisions 25% employer deduction limit Employer contributions usually are discretionary, but must be “substantial and recurring” Forfeitures usually are reallocated to remaining participants’ accounts 5-8

9. Defined Contribution Retirement Benefits Type of Plan Limits on Employer Contribution Limits on Employee Deferrals Allocation of Employer’s Contributions Administrative Costs/Burden Target Benefit 25% deduction limit—subject to minimum funding standard Not availableAge weightedActuary first year Money Purchase 25% deduction limit—subject to minimum funding standard Not availableFixed contributions, can be integrated with Social Security Relatively low Profit Sharing 25% deduction limit 401(k)— (indexed) $18,000 plus catch-up if eligible Plan formula may use salary or service; can be age weighted or include integration with Social Security Relatively low — employer contributions must be “substantial and recurring,” but employer has flexibility with annual contributions 5-9

10. Practice Problem 1 Match each item in the left-hand column with the appropriate item in the right-hand column Characteristics of Employer Contributions Retirement Plans A. Mandatory, uniform percentage of pay _____Profit sharing plan B. Mandatory, age-weighted allocation _____Cross-tested C. Cashless _____Money purchase plan D. Requires a gateway contribution _____Stock bonus plan E. “Substantial and recurring” _____Target benefit plan 5-10

11. Question 2 Which one of the following is not a characteristic of a target benefit plan? a.The retirement benefit is not certain; investment risk is borne by the participant. b.Annual additions are limited to the lesser of 100% of compensation or $53,000 in 2015. c.Forfeitures may be applied to reduce the employer’s contribution, or they may be reallocated to remaining participants. d.The plan requires annual actuarial determination. 5-11

12. Question 3 Which of the following plans are subject to a 25% limit on deductible employer contributions? I.money purchase plans II.profit sharing plans III.target benefit plans IV.tandem (paired) plans a.I and IV only b.II and III only c.I, III, and IV only d.I, II, III, and IV 5-12

13. Question 4 Which of the following statements are correct descriptions of qualified plans? I.A target benefit plan is basically an age- weighted money purchase plan. II.A target benefit plan is a defined benefit plan. III.A money purchase plan is a pension plan. IV.A profit sharing plan is a flexible contribution plan. a.I and IV only b.II and IV only c.I, III, and IV only d.II, III, and IV only 5-13

14. Question 5 Which of the following are characteristics of an age-weighted profit sharing plan? I.An age-weighted allocation formula permits contributions to favor older employees rather than younger employees because the younger employees have more time to accumulate contributions and earnings in their accounts. II.An age-weighted allocation formula permits contributions to individual accounts to exceed the Section 415 limitations. III.If an age-weighted plan becomes top heavy, the vesting schedule would be limited to either a three-year cliff or six-year graded schedule; the plan also must provide a minimum contribution of 3% of pay to non-key employees. IV.An employer that uses an age-weighted allocation formula becomes subject to the minimum funding standards. a.I and III only b.II and III only c.I, II, and III only d.I, III, and IV only 5-14

15. Question 6 Which one of the following objectives for establishing a profit sharing plan would be best met through use of an age-weighted profit sharing plan? a.using the plan to motivate all employees b.believing that it is more important to motivate employees than it is to retain them c.maximizing contributions for older employees d.seeking to provide rank-and-file employees with a solid basis for retirement income 5-15

16. ©2015, College for Financial Planning, all rights reserved. Session 5 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits