1. 4-1

2. Employer-Sponsored Retirement Plans McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4

3. 4-3 RETIREMENT PLANS Defined Benefits Plans Defined Contribution Plans Hybrid Plans

4. 4-4 PLAN CHARACTERISTICS Participation Requirements Coverage Requirements Vesting Rules Accrual Rules Nondiscrimination Rules Testing Key Employee & Top-Heavy Provisions

5. 4-5 PLAN CHARACTERISTICS Minimum Funding Standards Social Security Integration Contribution & Benefit Limits Plan Distribution Rules Qualified Survivor Annuities Qualified Domestic Relations Orders Termination Rules & Procedures

6. 4-6 COVERAGE TESTS Ratio Percentage –70% of Participants NOT in Highly Compensated Group Average Benefit Test –Benefit Amount is 70% of Benefit Amount for Highly - Compensated

7. 4-7 VESTING Cliff Vesting –Vested after 3 Years Service Gradual Vesting –20% a Year After Year 2

8. 4-8 SAFE HARBORS Uniform Normal Retirement Benefit Uniform Post-Normal Retirement Benefits Uniform Subsidies Uniform Vesting & Service Crediting No Employee Contributions Period of Accrual

9. 4-9 LIMITS & DEDUCTIONS Maximum Benefit –$165,000, or –100% Highest Average for 3 Years –$5,000 Indexed Starting 2006 Employers with Less than 101 Employees Use Different Computation Methods

10. 4-10 DEFINED CONTRIBUTION PLANS Employees & Employers Contribute Employers Invest Contributions in Stocks and Bonds No Guarantee of Benefits Amounts Possible Types –Profit - Sharing Plans –Stock Bonus Plans –Employee Stock Ownership Plans

11. 4-11 INDIVIDUAL ACCOUNTS SOURCES Employer’s Contributions a % of Salary/Wages Employee’s Contributions a % of Salary/Wages Forfeitures Return on Investments

12. 4-12 DEFINED CONTRIBUTION PLANS Section 401 (k) Profit Sharing Stock Bonus ESOPs SIMPLE Section 403 (b) Tax Deferred Annuities Section 457

13. 4-13 SECTION 401(k) PLANS Also Cash or Deferred Arrangements (CODAS) Defer Income to Defined Contribution Plan For Employees of Private Sector or Tax- Exempt Companies Investment Gains Taxed when Received

14. 4-14 PROFIT – SHARING PLANS Fixed First $ of Profits - Specific % Pre - After - Tax Annual Profits Graduated First - $ of Profits – Contributions Increase as Profits Increase Profitability Threshold – Contributions Only When Profits Fall Within Limits

15. 4-15 STOCK BONUS PLAN Invest in Company Securities Must Meet Nondiscrimination Test Employees Vote May Like Shareholders May be Basis for 401 (k)s

16. 4-16 ESOPs Similar to Stock Bonus Plans Except: –Borrowed Money to Purchase Stock –Used Money for Other Business –May be Leveraged or Nonleveraged –Company Repays ESOP to Repay Loan

17. 4-17 SIMPLE For Companies with up to 100 Employees & $5,000 in Compensation Must be Only Retirement Plan Can be IRAs or 401 (k) s Meet Nondiscrimination & Vesting Limits up to $10,000 in 2005

18. 4-18 HYBRID PLANS Combinations of Defined Benefit & Defined Contribution Plans Types –Cash Balance –Target Benefit –Money Purchase –Age Weighted Profits Sharing

19. 4-19 TARGET BENEFIT PLAN Individual Accounts Total Benefits NOT Guaranteed Employers Use Actuarial Calculations Benefits Invested by Trustee Less Expensive for Employers

20. 4-20 MONEY PURCHASE PLANS Benefit Based on Account Balance at Retirement Contributions Based on Formula Contributions NOT Tied to Company’s Performance Excise Tax Penalties for Failure to Make Contributions

21. 4-21 INTEGRATION METHODS Defined Benefit Plans –Offset Approach –Excess Approach Defined Contribution Plans –Excess Approach

22. 4-22 EXECUTIVE RETIREMENT BENEFITS Earns $300,000 3 - Year Average $205,000 Exclude $95,000 from Defined Benefit Plan Formula Company May Set-Up a Nonqualified Deferred Compensation Plan Based on the $95,000

23. 4-23 TOP HAT PLANS Unfunded Created for Highly Compensated or Other Select Groups Exempt from ERISA Title I –Vesting –Funding –Fiduciary Responsibilities

24. 4-24 FUNDING MECHANISMS General Asset Approach (Unfunded) Corporate - Owned Life Insurance (Unfunded) Split - Dollar Life Insurance Rabbi Trusts (Unfunded) Secular Trusts (Funded) Employee - Owned Annuities (Funded)

25. 4-25 RABBI TRUSTS Irrevocable Grantor Trusts Unfunded, Exempt from ERISA For Executives & Key Employees Payments from General Assets Assets Reimbursed from Trust Not Very Secure