1. ©2015, College for Financial Planning, all rights reserved. Session 4 Defined Benefit Plans and Discrimination CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

2. Session Details Module2 Chapter(s)1, 3 LOs2-1 Describe the basic characteristics of a traditional defined benefit plan. 2-3 Calculate and analyze whether a defined benefit plan meets participation and eligibility requirements. 4-2

3. Defined Benefit Plan A promised pension benefit guaranteed by the sponsor Maximum contribution: the actuarially determined amount needed to fund a pension of the lesser of 100% of salary or $210,000 (2015) 4-3

4. Defined Benefit Plan Benefit Formulas Flat benefit: Service is not considered Benefit is flat amount or percentage of earnings Service reduction may be used: reduced benefit for <X years of service Unit benefit: Service increases benefit Benefit is a dollar amount per year of service or a percentage of earnings per year of service Participant accrues additional benefit each year Service limitation may be used; considers years of service up to specified maximum 4-4

5. Benefit Formula Examples Funding Formula Benefit CalculationExampleComments Flat Amount Formula Flat amount per month $250 per monthNo incentive for participants to continue employment after attaining maximum flat amount Flat Percentage Formula Flat percentage based on compensation 10% of comp. per year Incentive to increase compensation through raises but not to continue employment after attaining a desired benefit Unit Credit Formula Benefit determined on a combination of service and compensation 2% x years of service x average 3 highest years pay Incentive to attain additional years of service and additional compensation to increase ultimate benefit 4-5

6. Defined Benefit Plan Earnings Definition Career-average pay: average earnings over plan participation period Final-average pay: average earnings over final 3 or 5 years, or average highest 3 or 5 of last 10 years 4-6

7. Factors Affecting Annual Retirement Benefits in a Defined Benefit Plan Retirement Age Normal retirement: Stated by plan document, typically age 65 Retirement after normal retirement is adjusted upward, and before a normal retirement-age 62 the benefit is adjusted downward Years of Plan Participation (if maximum benefit formula of $210,000 is used) 10% reduction in maximum dollar limitation on normal retirement benefit for each year of plan participation (or year of service) less than 10 4-7

8. Defined Benefit Plan Participant Employer Advantages Generally, greater tax-deductible contributions than through defined contribution plan. Benefit is assured—backed by PBGC (up to $5,011). Generally, more beneficial to participants close to retirement age. Disadvantages Employer is obligated to pay benefits in accordance with plan provisions. Younger participant may benefit more from defined contribution plan over many years. Plan benefits are not portable. Retirement distributions generally are not cost-of-living adjusted. 4-8

9. Defined Benefit Plan Minimum Participation Test Defined benefit plans also must satisfy the minimum participation (50/40) test. The plan must benefit at least the lesser of 50 employees, or the greater of: o 40% of all the company’s ERISA eligible employees, or o two employees (one employee if there is only one employee) 4-9

10. Minimum Coverage Tests A qualified plan must satisfy one of two coverage tests for at least one day of each quarter: o Ratio Percentage Test: Percentage of eligible non- HCEs benefiting under plan must be at least 70% of percentage of HCEs benefiting o Average Benefits Test: Average benefit, as a percentage of compensation, for non-HCEs must be at least 70% of that for HCEs Employees excluded from the coverage tests: under age 21, or less than one year of service, or covered by a collective bargaining agreement 4-10

11. Highly Compensated Employee Was a “5% owner” (ownership of >5%) in the determination year or in the preceding plan year or In 2015, a person whose compensation was in excess of $115,000 in the previous year (2014) is a highly compensated person. o Employer has the option to limit highly compensated to the top-paid 20% employees based upon preceding year’s compensation. 4-11

12. Question 1 Which of the following best describes the average benefits test? a.The percentage of NHCs benefited by the plan must be at least 70% of the percentage of HCs benefited by the plan. b.Plan benefits for NHCs must be 70% of all employees’ benefits. c.The plan must benefit a nondiscriminatory classification of employees and the average benefit percentage for NHCs must be 70% of the average benefit percentage for HCs. d.The plan must benefit at least 70% of all employees. 4-12

13. Question 2 Which of the following best describes the ratio percentage test? a.The percentage of NHCs benefited by the plan must be at least 70% of the percentage of HCs benefited by the plan. b.Plan benefits for NHCs must be 70% of all employees’ benefits. c.The plan must benefit a nondiscriminatory classification of employees and the average benefit percentage for NHCs must be 70% of the average benefit percentage for HCs. d.The plan must benefit at least 70% of all employees. 4-13

14. ©2015, College for Financial Planning, all rights reserved. Session 4 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits