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IMch20 - CHAPTER 20 Employee Benefits Retirement Plans...

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CHAPTER 20 Employee Benefits: Retirement Plans SOCIAL SECURITY RETIREMENT BENEFITS Relationship of Work History to Benefit Amount Benefits Payable to Retired Workers Benefits Payable to Spouses and Children Taxation of Benefits PENSION PLANS Traditional Defined Benefit Pension Defined Contribution Pension Cash Balance Pension PLAN QUALIFICATION Eligibility Retirement Ages Form of Payment Other Plan Design Factors Benefit and Contribution Limits Inflation Protection Permitted Disparity Vesting Disability Provisions Pension Funding Plan Termination Insurance DEFERRED PROFIT-SHARING PLANS EMPLOYEE SAVINGS PLANS Thrift Plans Section 401(k) Plans INDIVIDUAL RETIREMENT ACCOUNTS Traditional IRA Roth IRA Rollover IRA SIMPLE PLANS KEOGH PLANS SECTION 403(b) PLANS KEY TERMS AND CONCEPTS Actuarial cost assumptions Actuarial cost methods Allocated plans Average indexed monthly earnings (AIME) Cash balance pension plans Deferred profit-sharing plans Defined benefit plan Defined contribution pension Early retirement Elective deferrals Employee Retirement Income Security Act (ERISA) Employee savings plans Employee stock ownership plans (ESOPs) Five-year cliff vesting 401(k) plan Full actuarial equivalent Graded seven-year vesting Individual retirement account (IRA) Insured pension plans Keogh plans Late retirement Lump-sum distribution option Mandatory retirement age Normal retirement age Pension Benefit Guarantee Corporation (PBGC) Pension plan 1
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Permitted disparity Plan termination insurance Premature distribution penalty Primary insurance amount (PIA) Qualified plans Retirement test Rollover Roth IRA Savings incentive match plan for employees (SIMPLE) Section 403(b) plans Social Security normal retirement age Stock bonus plans Thrift plan Trust fund plans Unallocated plans Vesting ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. The factors are the age of the individual who elects to receive benefits, the number of years the individual worked in employment subject to Social Security taxes, the wages earned in such employment, and the amount of earned income in the year Social Security benefits are paid. 2. Benefits change based on either months late or months early, relative to the normal retirement age. There is an actuarial reduction of 5/9 of 1 percent for each of the first 36 months that a worker retires early, plus an additional 5/12 of 1 percent for each additional month early. For workers who delay the start of benefits until after the social security normal retirement age, benefits are increased by 6.5 percentage points per year for those who reached age 62 in 2000. This figure is scheduled to increase by 0.5 percentage point every two years until it reaches 8 percent. 3. Retirees who are not yet age 65 can earn up to the annual limit ($10,080 per year as of 2000) without penalty. For earnings over the limit, the penalty is a reduction in benefits of $1 for every $2 in wages. At age 65, retirees may earn an unlimited amount of income and still collect full Social Security retirement benefits.
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