Chapter 14 Retirement Benefits 04 28 2014 Highlighted She Mentioned Will See Again quiz test etc Retirement Benefits 1 Workers economic Security during retirement 2 Private Employers NOT required to offer pension a Retirement benefits Pension is added to social security benefit SS b If you want a decent standard of living NEVER rely on Social Security to fund your retirement Pension Plans 1 Eligibility Standards a Usually more strict than other benefits b Who is Excluded from Pension Plans i Part time workers ii Not vested yet new people Independent contractors Self Employed iii iv Temps Temporary employees c Minimum age and minimum service requirement i Will not enroll anyone under age 21 Normal Retirement Age 1 Formal Definition Earliest age at which you can retire and receive full 2 It is specified in The Plan 62 65 69 in the plan 3 It will be a specified number of years of service work 4 Combination of both age and service benefits OR EXAMPLE OR a Retire at age 65 after 25 years of service b Whichever comes first 25 years of service or reach age 65 c Retire Early Reduce benefit d Retire Late Employer can increase benefit but it is NOT required to do so Pension Plans Defined Contribution Plan o Known o Example Amount Employer will contribute 5 of salary will be contributed by employer to retirement on behalf of employee o Unknown What is it work then an Employee retires What is the Employer investing in Growth Employee bears the risk because unknown future Employer liability is limited to the cash contribution made on behalf of the employee Advantage of defined Contribution Plan Employee sees the exact balance at all times Employee s who change jobs can move accounts from one employer to the other Employer can insure the person against fraud or theft Defined Benefit Plan Formula that determines the benefit at retirement o With proper info Employee can accurately calculate pension at retirement Unknown Amount Employer must contribute in any particular year o Employer bears the uncertainty and investment risk Future liability for employer Defined Benefit Plan philosophy o Reward longer service o EXAMPLE 2 of final average salary at Normal Retirement Age Final Average Salary Last 5 Years leading up to retirement Age 65 50 000 64 49 000 63 48 000 62 47 000 61 46 000 Average 48 000 Formula o Number of Service Final Average 2 30 Years 48 000 2 28 800 12 2 400 per month Sometimes instead of last 5 years they will look at career average o Age 65 45 000 25 Years of Service o 25 45 000 2 22 500 12 months 1 875 per month Death Benefit it depends on what is in the plan o ERISA Establishes minimum standards of operating a pension plan Preserves benefits guards against abuse Vesting Vested Benefit is one where payment status does NOT depend on employment status Vesting enhances the portability of benefits A degree to which Pension Plan participants will not forfeit Pension Employee is always entitled to take with them his her contribution plus rights interest Vesting refers to the Employer s contributions ERISA This changed now you can take something of the employer s contribution 1 5 Year Cliff Vesting Got to be employed 2 Graded 7 year vesting i 20 after 3 years i 40 after 4 years ii 60 after 5 years iii 80 after 6 years iv 100 after 7 years 3 100 vested after 2 years with a 2 year waiting probation period EXAMPLE Employee 4 years of service Employee contribution 40 000 ALL Employee contribution 60 000 How much of the 60 000 can she take Cliff Vesting 0 Graded 7 Year 40 60 000 24 000 All 100 of 60 000 Employee Savings Plans Supplement to other Qualified Plans In Place of Employer s Plan o Tax Advantage to Employee 1 For Profit Company 2 Not For Profit Company a 401K a 403 B These are cash deferred plans Immediate tax deduction for employee Employer may or may not match employee contribution NOT Required to Employee gets salary Now Taxed If Employee defers cash not taxed now o Taxed Later when you withdraw it Income is less Future Payment Employee s generally have a say regarding where it is invested Watch Out investing in company stock Employee Savings Plans 401k 403 B Cash Deferred IRA Individual Retirement Act o Supplement to Retirement Income o Funds are invested o Tax Deferred o Pay tax upon distribution o Can do IRA if you have no access at work to 401k or 403 B Either 401K 403 B OR IRA Rules of IRA s IRS will lose tax revenue Cannot withdraw before age 59 Except for death or disability 10 penalty for WD After age 59 treated as ordinary income Hardship Withdraw Loan No Repayment Prevent eviction or foreclosure Medical Expenses Death of a Spouse College Education Purchase of Primary Residence Seriously impact retirement funds Rollover Roth IRA Purchased with after tax NO pre tax Deposit funds Interest tax free Withdraws are Tax free Cannot touch it Rolls to new employer Mentioned In Class To Know Defined Contribution Plan Defined Benefit Plan Vesting 04 28 2014 04 28 2014
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