Auditing Employee Benefit Plans. Josie Hammond
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СКАЧАТЬ alt="images"/>Exhibit 1-1 Defined contribution and defined benefit

Defined contribution Defined benefit
Pension Welfare Pension Welfare
Purpose Fund retirement income Pay current, post-employment or post-retirement benefits Fund retirement income Pay current, post-employment or post-retirement benefits
Benefit Amount Based on participant account balances Same as pension Based on a formula defined in the plan document Same as pension
Actuary Required No Maybe Yes Maybe
Contributions Made on a discretionary basis or by formula Specified by terms of the plan Actuarially determined Pay-as-you-go, determined by actuary or by formula
Assets Value equals accumulated benefits Same as pension Value not equal to accumulated benefits Same as pension
Individual Accounts Balance represents accrued benefit for each participant Same as pension No—even cash balance plans lack individual accounts No
Examples of Plans Profit-sharing, stock bonus, 401(k), money purchase, target benefit, thrift or savings, ESOP, 403(b) Flexible spending accounts, medical, dental, disability, legal services, severance Defined benefit pension plan, cash balance Medical, dental, life, disability, legal services, severance

      Pension plans

      Defined contribution plans

      Profit-sharing plans

      Profit-sharing plans are defined contribution plans in that they provide individual accounts for each participant, and benefits are based on the amount contributed to the account, along with any income, gains, and forfeiture allocations less an allocated share of expenses and losses. Profit-sharing plans are distinguished from other defined contribution plans because the contribution is usually discretionary. Management or the board of the plan sponsor can choose whether or not to make a contribution in any year and the amount of such contribution. Some of these plans do include formulas for determining the contribution, but that is not required.

      What is required is that the plan document include a specific formula for allocating the contribution. Some plans allocate the contribution based solely on compensation. Others use a combination of compensation and years of service. It is permissible, within limits, for these plans to allocate higher contribution rates on wages above the Social Security wage base than on wages earned below that level. Some plans employ a concept known as cross-testing or age-weighted formulas. These plans allocate different contribution rates to different employee classes. The plans may be tested for discrimination based upon the future benefit levels provided by these contributions, rather than the current contribution rate.

      Even with the complexity of concepts such as cross-testing, profit-sharing plans are among the simplest of plan designs. As we cover the tax compliance issues of plans, you will note that profit-sharing plans are exempt from some of these requirements.

      Stock bonus plans

      These are substantially similar to profit-sharing plans. The primary difference is that they are expected to make plan distributions in employer securities; however, in recent years, even that requirement has been diluted. As such, other than employee stock ownership plans (ESOPs), you rarely see a stock bonus plan.

      You may encounter a stock bonus plan as a component of an ESOP sponsored by an S Corporation. Because of a very rigorous testing rule that applies solely to these arrangements, it sometimes becomes necessary to transfer a portion of the shares out of the ESOP into another non-ESOP defined contribution plan or component within a single plan. This could include a profit-sharing, stock bonus or 401(k) plan.

      401(k) plans

      These plans are subject to more restrictions than profit-sharing or stock bonus plans that are funded solely by employer contributions.

      As with all defined contribution plans, the employee bears the investment risk. In contrast, the plan sponsor or employer has a predictable benefit cost as defined by the plan design.

      There are five types of contributions that can be made to a 401(k) plan, although only elective contributions are actually required. The five types are as follows:

       Elective pretax contributions. Employees elect to have a portion of their compensation contributed and tax-deferred under the CODA. These contributions must be fully vested and there are restrictions on withdrawals. These are subject to a special discrimination test referred to as the average deferral percentage (ADP) test.

       Voluntary СКАЧАТЬ