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CRPC NEWEST 2024-2025 ACTUAL EXAM WITH 450
QUESTIONS AND VERIFIED ANSWERS (ALREADY
GRADED A+)
2.2. Explain how pension benefits are reduced by early retirement.
Early retirement reduces the benefits paid by defined benefit pension plans.
This is because benefits are a function of final average salary (which is
generally lower for the early retiree) and years of service.
Defined Benefit Plans - ANSWER-Plans that provide for the payment of
determinable retirement income benefits. This is specified in advance.
Example. As a retiring employee of BladeTek Corporation, Fred is slated to
receive 2% of his average salary over his last five years times his years of
service. Since Fred's average salary during those last five years was
$80,000, and since he put in 25 years of service, his annual retirement
benefit is calculated as follows:
$80,000 × 0.02 × 25 = $40,000
Defined Contribution Plans - ANSWER-Employer contributes specific %
No guarantee on future benefits
Employee bears investment risk
Pension expense = employer contribution
Example. Bentley participates in a defined contribution plan. His employer
contributes a specified amount to the plan. What Bentley will receive during
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retirement will depend on the investment results of the employer's
contributions. There is no formula based on Bentley's earnings, years of
service, etc., as in the defined benefit plan.
COBRA for Terminated Employees - ANSWER-COBRA requires most
employers, those with 20 or more employees, to provide continued
coverage through their group medical plans to employees and their
dependents—without proof of insurability—in the case of certain qualifying
events: the employee is terminated (and not for gross misconduct); the
employee dies; the employee is divorced or legally separated. In most
cases, this continued coverage must be made available for a period of 18
months and may be available for up to 36 months for certain situations. The
former employee, however, must pay the full premiums (plus 2% for
administrative costs) for the group policy that COBRA has made
accessible.
Lump-Sum Distribution from Qualified Retirement Plan - ANSWER-
Distributions from qualified plans, such as what Harold envisions, are fully
taxable in the year in which they are received. Thus, if Harold received a
$300,000 lump-sum distribution in a single year, the entire amount would
be counted as taxable income in that year. If Harold was born before 1936,
he should consult his tax adviser to determine if he is eligible for special
forward averaging.
Harold could avoid or minimize the tax. Rolling over the lump sum into an
IRA would make the distribution nontaxable. Of course, any amounts
withdrawn from the IRA would be taxable. If he does not choose to do a
direct rollover, Harold could reduce the amount of his tax liability by
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receiving distributions from a life annuity or a fixed period annuity. He
would then be liable only for the amount received each year.
Separation of Service at age 55 - ANSWER-Section 72(t) of the Internal
Revenue Code allows penalty-free distributions from qualified plans and
403(b)s to participants who separate from service at age 55 or older. Thus,
the 55-plus early retiree can take benefits, either in a lump sum or in
regular or irregular payments, and escape the 10% penalty. Of course,
there is no escaping income tax on these distributions. Attaining age 55 is
defined by the IRS as being 55 on December 31 of the year of separation.
Premature Distributions for Defined Benefit and Defined Contribution Plans
- ANSWER-Normally, qualified plan distributions to participants under the
age of 59½ are, like IRA distributions, subject to a 10% penalty. However,
the tax code provides a special "separated from service" exception for
employees age 55 and older. There is no exemption from the income tax
liability created by these distributions, however.
Periodic IRA Payments - ANSWER-Once John has begun taking periodic
IRA payments, he must stick with this distribution method for five years.
(The rule is for five years or until age 59 whichever comes later.) Failure to
observe this rule will trigger the 10% penalty on all previous payments.
After five years, John can change his distribution arrangement without
penalty.
Social Security Penalties for Working After FRA - ANSWER-Until a person
reaches his or her Social Security full retirement age, Social Security
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benefits are reduced if the recipient's earnings exceed a certain allowable
limit. The allowable limit is raised each year. In applying the earnings test
for the calendar year, only earnings before the month of attainment of full
retirement age are considered. In 2021, a person under the full retirement
age (age 66-67 for persons born in 1943 and later, based on birth year)
loses $1 in Social Security benefits for every $2 earned above the
allowable limit of $18,960.
The rules for calculating the work penalty are different for the year in which
an individual attains full retirement age. $1 in benefits will be deducted for
each $3 an individual earns above the $ 50,520 limit for 2021, but only
counting earnings before the month in which an individual reaches his or
her full retirement age. For example, if an individual earns $60,520 during
the months before the month in which he or she reaches full retirement
age, $3,333 (33% of $10,000) in Social Security benefits will be lost
because of the work penalty.
A person who attains his or her Social Security full retirement age can earn
as much as he or she wishes without a benefit reduction.
Window Plan - ANSWER-A window plan describes a set of incentives used
to reduce corporate headcount through voluntary early retirement. Unlike
most severance packages, employees have the option to decline a
voluntary severance package. These are often referred to as open window
plans since they offer a window of three to six weeks during which eligible
employees can choose to accept or reject the offer. Once that time has
elapsed, the window shuts and the offer is off the table.
