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Lecture 24 Profit-Sharing and Similar Plans <ul><li>Trends </li></ul><ul><li>Qualified Profit-Sharing Plans </li></ul><ul>...
Trends in Qualified Plans <ul><li>Most new plans are defined contribution, rather than defined benefit  </li></ul><ul><li>...
Qualified Profit-Sharing Plans <ul><li>Eligibility </li></ul><ul><li>Vesting </li></ul><ul><li>Employer contributions </li...
Savings or Thrift Plans <ul><li>Employee contributions are after-tax </li></ul><ul><li>Matching employer contributions </l...
Employer Stock Plans <ul><li>Advantages </li></ul><ul><ul><li>Deduction for noncash contributions </li></ul></ul><ul><ul><...
Stock Bonus Plans <ul><li>Considered qualified defined contribution plan </li></ul><ul><li>Stock allocated to each employe...
Employee Stock Ownership Plan <ul><li>Three parties </li></ul><ul><ul><li>Employer </li></ul></ul><ul><ul><li>Bank </li></...
Errors in Chapter 22 <ul><li>Page 557 - Figure 22-1 </li></ul><ul><ul><li>1st graph is Defined Benefit </li></ul></ul><ul>...
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Lecture 24 Profit-Sharing and Similar Plans

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Transcript of "Lecture 24 Profit-Sharing and Similar Plans"

  1. 1. Lecture 24 Profit-Sharing and Similar Plans <ul><li>Trends </li></ul><ul><li>Qualified Profit-Sharing Plans </li></ul><ul><li>Savings Plans </li></ul><ul><li>Employer Stock Plans </li></ul><ul><ul><li>Stock Bonus Plan </li></ul></ul><ul><ul><li>Employee Stock Ownership Plan (ESOP) </li></ul></ul><ul><li>Errors in Text - Chapter 22 </li></ul>
  2. 2. Trends in Qualified Plans <ul><li>Most new plans are defined contribution, rather than defined benefit </li></ul><ul><li>Some employers are shifting from defined benefit to defined contribution </li></ul><ul><li>Reasons </li></ul><ul><ul><li>Less risk to employer </li></ul></ul><ul><ul><li>Recent stock market performance (since 1982) </li></ul></ul><ul><ul><li>Many employees prefer defined contribution </li></ul></ul><ul><ul><li>PBGC premium increases </li></ul></ul><ul><li>Large, unionized companies still tend to have defined benefit plans </li></ul><ul><li>Now more plans are defined contribution but more workers covered under defined benefit </li></ul>
  3. 3. Qualified Profit-Sharing Plans <ul><li>Eligibility </li></ul><ul><li>Vesting </li></ul><ul><li>Employer contributions </li></ul><ul><ul><li>Formula </li></ul></ul><ul><ul><li>Discretionary </li></ul></ul><ul><ul><li>Deductible amount limited to 15% total compensation </li></ul></ul><ul><li>Allocation to employee accounts </li></ul><ul><ul><li>Generally based on compensation </li></ul></ul><ul><li>Age-based allocation </li></ul><ul><ul><li>Requires cross-testing </li></ul></ul><ul><li>Forfeitures </li></ul><ul><ul><li>Can be allocated to remaining participants </li></ul></ul><ul><li>Participant directed investments </li></ul><ul><li>Withdrawals and loan provisions </li></ul>
  4. 4. Savings or Thrift Plans <ul><li>Employee contributions are after-tax </li></ul><ul><li>Matching employer contributions </li></ul><ul><li>Voluntary </li></ul><ul><li>Nondiscrimination rules </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Tax deferred savings </li></ul></ul><ul><ul><li>Availability of funds </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Does not maximize tax advantage </li></ul></ul>
  5. 5. Employer Stock Plans <ul><li>Advantages </li></ul><ul><ul><li>Deduction for noncash contributions </li></ul></ul><ul><ul><li>Creates market for employer stock </li></ul></ul><ul><ul><li>Employees gain ownership interest </li></ul></ul><ul><ul><li>Unrealized appreciation is deferred </li></ul></ul><ul><ul><li>Provides some protection against hostile take-overs </li></ul></ul><ul><li>Two types </li></ul><ul><ul><li>Stock bonus plan </li></ul></ul><ul><ul><li>ESOP </li></ul></ul>
  6. 6. Stock Bonus Plans <ul><li>Considered qualified defined contribution plan </li></ul><ul><li>Stock allocated to each employee </li></ul><ul><li>Distributions subject to restrictions </li></ul><ul><ul><li>10% penalty if not 59 1/2, retired, disabled or dead </li></ul></ul><ul><ul><li>Must begin within 5 years of separation or 1 year of retirement </li></ul></ul><ul><li>Employee at risk for stock performance </li></ul>
  7. 7. Employee Stock Ownership Plan <ul><li>Three parties </li></ul><ul><ul><li>Employer </li></ul></ul><ul><ul><li>Bank </li></ul></ul><ul><ul><li>ESOP </li></ul></ul><ul><li>Allows company to borrow money and repay with fully deductible payments </li></ul><ul><li>Initially, additional tax benefits for funding ESOPs </li></ul><ul><li>Diversification requirement </li></ul><ul><ul><li>If 55 with 10 years of service, can select to diversify </li></ul></ul>
  8. 8. Errors in Chapter 22 <ul><li>Page 557 - Figure 22-1 </li></ul><ul><ul><li>1st graph is Defined Benefit </li></ul></ul><ul><li>Page 560 - 4th line from bottom </li></ul><ul><ul><li>Should be “(by assuming ...” </li></ul></ul><ul><li>Page 562 - Examples </li></ul><ul><ul><li>if 10% of compensation below wage base, then can contribute 15% (maximum) of compensation above wage base </li></ul></ul><ul><ul><li>if 4% of compensation below wage base, then can contribute 8% of compensation above wage base </li></ul></ul><ul><li>Page 566 - Second paragraph from bottom </li></ul><ul><ul><li>Statement “or the insurer’s term insurance rates” should be deleted </li></ul></ul>
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