CHAPTER 19--DEFERRED COMPEN

The benefits for an employee depend on how much

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contribution plans, a cash balance plan accrues benefits to individual accounts. The benefits for an employee depend on how much builds up over time in the employee's account and not on a formula based on years of service and preretirement pay. Cash balance plans are better for younger, mobile employees, and the companies save money by reducing pension payouts for older and longer-service employees. 99. Explain the participation requirement for a qualified plan. A qualified plan must provide, at a minimum, that all employees in the covered group who are at least 21 years of age are eligible to participate after completing one year of service. A year of service is generally defined as the completion of 1,000 hours of service within a measuring period of 12 consecutive months. As an alternative, where the plan provides that 100% of an employee’s accrued benefits will be vested upon entering the plan, the employee’s participation may be postponed until the later of age 21 or two years from the date of employment. Once the age and service requirements are met, an employee must begin participating no later than the earlier of the following: · The first day of the first plan year beginning after the date on which the requirements were satisfied. · Six months after the date on which the requirements were satisfied. Since a qualified plan must be primarily for the benefit of employees and be nondiscriminatory, the plan has to cover a reasonable percentage of the company employees. A plan will be qualified only if it satisfies one of the following tests: · The plan benefits a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees benefiting under the plan (the ratio percentage test ). · The plan meets the average benefits test . 100. What is the most significant difference between a traditional IRA and a Roth IRA? Contributions to a traditional IRA may be deductible. Distributions from a traditional IRA are subject to taxation as ordinary income. No deductions are available for contributions to a Roth IRA. If the 5-year requirement is satisfied, distributions from a Roth IRA are tax-free. 16
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101. Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP). Defined benefit and defined contribution plans have become complex and costly, due to restive legislation over the past 15 years. Thus, a SEP has become an alternative to these traditional plans. Some advantages of the SEP are as follows: · Less costly and complex. · Can establish after the end of the tax year. · Vesting immediately. There are still some disadvantages of a SEP: · There is a 25% deduction limit for a SEP rather than a 100% deduction for certain defined contribution plans. · Participation rules are stricter. · There are no 10-year forward averaging techniques for certain lump-sum distributions.
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  • Spring '12
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  • a. b. c., b. c. d., C. D. E.

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