An employer who chooses to follow this method has

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An employer who chooses to follow this method has selected what is called a fully insured plan . If an employer chooses to operate a fully insured plan, they will pay fees to the insurance company for assuming the risk. The plan sponsor will then be exempt from minimum funding requirements within its DB plan because the insurance company is guaranteeing full payment of the benefits to retirees. In order for this exemption from regulation to apply, the fully insured plan must include certain specific features. The first feature is that the series of payments to the insurance company must be in the form of a level annuity. They cannot make a series of balloon payments (large dollar amounts clustered at certain time periods) because these balloon payments would look a lot like a plan that is not truly fully insured. The second feature is that all benefits paid from the insurance contract must equal the benefits due per the plan document of the DB plan. The third feature is that the plan must be expressly guaranteed by the insurance company.
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The next feature is that all premiums must be paid on time. Regulators do not want a company to enter into a fully insured contract and then default on the insurance company, which would be the same thing as defaulting on the DB plan outright. The final feature is that the insurance product cannot permit any loans from its balance to the employer. Funding a DC Plan There are only two defined contribution plans that have a minimum funding requirement. They are both in the “pension plan” category along with DB plans. They are the money purchase pension plan (MPPP) and the target benefit plan. The other defined contribution plan types which are not on this list of two do not technically have a minimum funding requirement. However, if those “exempt” funds fail to meet any contributions that are promised in the plan document, then those funds risk being disqualified. Recall that plan disqualification means that all retroactive contributions since the plan's inception are no longer tax-deferred, creating a huge tax nightmare to unwind. This is obviously a scenario to avoid at all costs. Because defined contribution plans do not have a required payout in retirement, the minimum funding requirement is determined by whatever is promised in the respective plan documents. They are pay-as-you-go because the sponsor just needs to pay contributions to the plan as they are earned without consideration to liabilities (because there are no formal liabilities in a DC plan). Just like with their DB cousins, a defined contribution plan that fails to meet its minimum funding requirement will have a 10% "excise tax” charged by the IRS. Contributions to all defined contribution plans are limited to the 415(c) limit. However, plan sponsors can only deduct up to 25% of aggregate compensation. The 415(c) limit is applied to every participant individually, but if aggregate payroll is $5,000,000 for a given tax year, then the employer cannot deduct more than $1,250,000 ($25% x $5,000,000) in total contributions. If applying the
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  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan, HCES

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