That was a lot of work because of the level of work

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That was a lot of work! Because of the level of work required to calculate such a simple 3-person age- weighted plan and because someone in Stephanie’s situation might be frustrated that she earns exactly the same amount as John but gets a smaller retirement plan allocation, most employers simply go with a cross-tested plan if they want to skew benefits in favor of older workers. Common Choices for Various Plan Types You have now learned about safe harbor options, integrated options, cross-testing, and age-weighting. Which combination(s) is (are) most widely used in the various plan types? Profit-sharing plans and their various offshoots typically stick with a safe harbor design. They might choose a level percentage or a plan integrated with Social Security. They are able to use either a cross- tested or age-weighted model, but the safe harbor is most common in practice. 401(k)s all must apply either the ADP test or the ACP test depending on whether or not the employer offers matching contributions. Because they are a profit-sharing-like plan, they can also offer the same design choices that apply to profit-sharing plans. Safe harbor is also the most common design type in practice. Money purchase pension plans , like profit-sharing plans, have access to everything, but employers usually just stay with a safe harbor plan. If they wanted the complexity of the other plan design types, then they would instead offer a profit-sharing plan to capture the benefit of contribution flexibility. 403(b) plans need to apply the ACP test if employer matching is involved. However, they avoid ADP testing. They are also profit-sharing-like plans and so they can access safe harbors, integrated plans, cross-tested plans, or age-weighted plans. They also typically stick with safe harbors. The only option for a SEP is a safe harbor. Cross-testing and age-weighting are not permitted. A SIMPLE also has specific rules that apply. These were discussed in Module 1 Lesson 6. Target-benefit plans are not widely used in general. Because they are so close to a straight DB plan, it is usually the defined benefit plan that is chosen if a company wants this type of plan. DB-type plans are being used less and less because of the unfavorable risk profile for the employer. If a target-benefit plan were being chosen, then they would not want to use age-weighting if there are any older NHCEs. This would not have the desired effect. A straight defined benefit plan has its own set of choices. A DB plan can use a safe harbor design that offers either the same dollar benefit to all employees or the same percentage of FAC for all employees. These two options both assume that the employer offers a uniform retirement age. It would not be appropriate for executives to be permitted to retire at 60 while rank-and-file are required to work until age 65. DB plans are permitted to integrate their benefits with Social Security, but they have a complex calculation that involves a different calculation for “covered compensation” instead of the taxable wage base.
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  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan, HCES

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