1. Copyright © 2007, The American College. All rights reserved. Used with permission. Planning for Retirement Needs Death and Disability Benefits; Top-Heavy Rules Chapter 10

2. Copyright © 2007, The American College. All rights reserved. Used with permission. Chapter 10: Death, Disability, Top-heavy Death benefits Mandatory death benefits Disability Top-heavy

3. Copyright © 2007, The American College. All rights reserved. Used with permission. Death Benefit Design Death benefits depend on company’s objectives and should be coordinated with other company death benefit programs If insurance is used incidental death benefit requirements must be satisfied Plan must contain required mandatory death benefits

4. Copyright © 2007, The American College. All rights reserved. Used with permission. Incidental Death Benefits Cost cannot exceed –25 percent of account for term and universal –50 percent for whole life In the alternative in a defined-benefit plan the benefit cannot exceed 100 times the monthly retirement benefit.

5. Copyright © 2007, The American College. All rights reserved. Used with permission. Tax Treatment of Life Insurance The cost of pure insurance protection included in income each year Amount is lesser of table amount or company 1-year term rate Note that IRS Table 2001 replaces P.S. 58 table P.S. 58 costs are recovered tax-free upon distribution of contract (except for sole proprietors and partners)

6. Copyright © 2007, The American College. All rights reserved. Used with permission. Mandatory Death Benefits Qualified pre-retirement survivor annuity –Defined benefit plans Required only for married participants Amount equal to payments under a 50% QJSA Can charge for cost of benefit (reduce retirement benefit) If you charge, then must allow participants to elect out –Defined contribution plans Annuity for the life of surviving spouse equivalent to 50% of vested account balance Typically give entire account balance

7. Copyright © 2007, The American College. All rights reserved. Used with permission. Mandatory Death Benefits Qualified Joint and Survivor Annuity (QJSA) –50% (to 100%) survivor annuity as normal form –Right to elect out with participant and spouse consent (90 days prior to annuity starting date) –Profit-sharing plans can elect out Plan does not allow annuity options Plan does not accept transfers from plans subject to the J&S requirement If married participant dies prior to retirement, the spouse gets 100% of plan benefit

8. Copyright © 2007, The American College. All rights reserved. Used with permission. Disability Benefits Plans typically do not provide disability benefits through retirement plans Be careful to coordinate coverage Still many provide for –Full vesting –Payout at disability Some provide for benefit accruals during disability to provide for adequate pensions Choose definition of disability that facilitates administrative ease

9. Copyright © 2007, The American College. All rights reserved. Used with permission. Top-heavy Every qualified plan must have language addressing top-heavy status –Top heavy plans have special vesting –Top heavy plans have minimum contributions What is a top-heavy plan? –60% of account balances for key employees –Present value of accrued benefits for DB plan –Multiple plans must be aggregated if a plan covers a key employee or plan that depends on key employee for qualification

10. Copyright © 2007, The American College. All rights reserved. Used with permission. Top-heavy What are the special vesting rules that apply to top-heavy defined-benefit plans? –3 year cliff or (3 years 100%) –6 year graded (2/20, 3/40, 4/60, 5/80, 6/100) Who is a key employee? –Officers earning over $145,000 (in 2007) count 3 officers up to 32 employees, then 10 percent of workforce, if over 500 then 50 officers –5 percent owner –One percent owner and earning $150,000

11. Copyright © 2007, The American College. All rights reserved. Used with permission. Top-heavy What are the special contribution rules that apply to top-heavy plans? –Defined benefit--2 percent for each year of service up to 10 years or 20 percent. –Defined contribution--3 percent unless the amount contributed for any key employee is less

12. Copyright © 2007, The American College. All rights reserved. Used with permission. Mini Case Studies Discuss mini case studies at the end of chapter 10

13. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A profit-sharing plan that is not top-heavy could have a vesting schedule that provides 60% vesting after 3 years and 100% vesting after 7 years. Sally Feathers, who owns 4% of the company and earns $125,000 is a key employee. A top-heavy profit-sharing plan must always allocate 3 percent of compensation to non-key employees.

14. Copyright © 2007, The American College. All rights reserved. Used with permission. True/False Questions A participant can elect out of the QJSA as long as the participant and spouse consent in writing to such an election. When life insurance is purchased for a participant in a qualified plan, the entire premium is treated as taxable income to the participant.