MODULE 11: UNIT 4 Defined Contribution Pension Plan

Question 1

Defined Contribution Pension Plan

Answer 1

• where contributions into the plan are based on a specific formula and the sum of accumulated contributions and earnings, credited to a plan member, is used to purchase a pension at retirement
• Requires employer contributions & employee contributions
• allocated specifically to each plan member where the member’s funds are held and earn an investment return

Question 2

Plan Fit

Answer 2

• resulting benefits from the plan are dependent upon the total contributions and investment performance of the plan’s assets
• Other types of defined contribution plans include a Profit Sharing Pension Plan (PSPP), a Deferred Profit Sharing Plan (DPSP) and a Registered Retirement Savings Plan (RRSP)
• Inherent characteristic: plan member assumes responsibility for the investment risk

Question 3

Contributions

Answer 3

• May be based on a fixed percentage of pensionable earnings

- Fixed dollar amount or specified amount on years of service or hours worked

Question 4

Contributions: Integration with Government Benefits

Answer 4

-integrated contributions often means reducing the pension plan’s contribution rate by the CPP contribution rate on the pensionable earnings up to the YMPE

Question 5

Contributions: Investment Selection

Answer 5

it is the sum of the contributions and investment earnings that will later be used to purchase a retirement income

Question 6

Contributions: Maximum Contributions

Answer 6

• Minimum annual contributions of 1% by the employer

Limit for 2006 is lesser of:

• 18% of earnings
• $24,270

Question 7

Benefits: Entitlement

Answer 7

-refers to the value of the funds accumulated within the pension plan to which one is legally entitled, under various circumstances

There are a number of occasions when it is necessary to communicate a member’s benefit entitlement under a registered pension plan:

• Employment Termination
• Retirement
• Death
• Termination of the pension plan

Question 8

Benefits: Benefit Calculation

Answer 8

There is no restriction on the maximum pension that may arise under a defined contribution pension plan

Question 9

Benefits: Comparison (Defined Benefit vs Defined Contribution)

Answer 9

In a defined contribution plan, investment earnings in the early years have the greatest effect on the eventual pension, since investments compounded over a long period of time directly impact the total asset accumulation under the plan

Question 10

Benefits: Defined Contribution Plan – Pension Projection

Answer 10

Calculated using the time value of money calculations and some basic assumptions

Question 11

Retirement: Normal Retirement

Answer 11

• age 65
• incorporate a joint and survivor form of pension
• With spousal permission to opt out of the minimum requirement, the plan member is free to select an annuity, which may include:
• -Life Income Annuity
• -Life Annuity with a Guaranteed Period
• -Joint and Survivor
• -Joint and Survivor Option with a Guarantee Period

Question 12

Retirement: Early Retirement

Answer 12

A defined contribution plan usually includes a minimum prescribed age at which a plan member may draw a pension from the plan, which is commonly set at age 55

Question 13

Retirement: Bridging Benefits

Answer 13

• The Act permits bridging benefits for money purchase plans with no limit as to the amount
• the benefit must cease by the end of the month following the month of the member’s 65th birthday
• not normally part of a defined contribution plan, but can be used as a supplemental benefit

Question 14

Retirement: Postponed Retirement

Answer 14

• no later than age 71

- potential that the pension will be larger than normal retirement age

Question 15

Retirement: Termination of Employment

Answer 15

Upon termination of employment before retirement, the member of a defined contribution plan is entitled to the current value of his own contributions

a plan member is usually entitled to the following options:

A lump-sum payment of any funds that are not vested or locked-in by law

Transfer of the assets to another registered pension plan, if allowed by both the transferring and receiving plans

A deferred life annuity commencing before the end of the year the employee reaches age 69

A lump-sum transfer to a locked-in RRSP or locked-in retirement account (LIRA)

A lump-sum transfer to a life income fund (LIF), or, if allowed in the jurisdiction, a life retirement income fund (LRIF)

Question 16

Retirement: Pre-Retirement Death

Answer 16

-There is no uniformity in the standards applied to pre-retirement death benefits across the various jurisdictions

-

Question 17

Retirement: Post-Retirement Death

Answer 17

the form of pension originally selected at retirement will determine what benefits, if any, will be payable subsequent to the member’s death

Question 18

Retirement: Relationship Breakddown

Answer 18

The division of pension assets upon marriage breakdown crosses pension and family law

Question 19

Income Tax Implications: Contributions

Answer 19

• Tax deductible business expense for employer
• not taxable benefit to employee
• employees contributions are tax deductible

Question 20

Income Tax Implications: Benefit Payout

Answer 20

• Amounts paid out to employees on a periodic basis are generally fully taxable to the recipient
• amounts paid out to employees on a periodic basis are generally taxable to the recipient

Question 21

Income Tax Implications: RRSP Contribution Room

Answer 21

The value of the benefits earned under a registered pension plan is approximated by the “Pension Adjustment” (PA), which is subtracted from the RRSP contribution room for the plan member

-Contributions made into a pension plan directly affect the pension plan member’s RRSP contribution room

RRSP 10% x prior TKS income to a max $25,300 (2016)
$100,000 x 18% = $18,000
$18,000 - $10,000(pension adjustment) = $,8000