types of defined contribution plans

7/31/2019 Types of Defined Contribution Plans

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Cash or Deferred Arrangements (CODAs)

It permits employees to defer part of their

compensation to the trust of a qualifieddefined contribution plan.

Only private sector or tax- exempt employers

are eligible to sponsor 401(k)plans


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It offers tax benefits.

1. Employees do not pay income taxes on the

contributions to the plan until they withdrawfunds.

2. Employers deduct their contributions to theplan from taxable income.


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3. Investment gains are not taxed untilparticipants received payments.


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To distribute money to employees.

Companies start by establishing a

Companies determine the pool of profit-sharing money by application of a formula.


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Allocation Formulas:

All employees should share

equally in the companys gains in order topromote cooperation among employees.

higher paying jobspresumably indicate the greatest potential toinfluence a companys competitive position.


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measureemployee contributions to profits based on

job performance.


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Rewards employees with company stock.

Benefits are also paid in shares of company

stock.

Participants of stock bonus plans possess theright to vote as shareholders.


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Leveraged or Non Leveraged

plan administrator

borrows money from a financial institution topurchase company stock.

the company

contributes stock or cash to buy stock.


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Defined Benefit PlanDefined ContributionPlan

Determines pensiondue at normalretirement age.

An annuity- series of

payments beginning atthe plans normal agefor the life of theparticipant.

Determines amountregularly contributedto individual account.

A single lump sum

distribution anytime.


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Defined Benefit Plan Defined Contribution Plan

Employee isguaranteed benefitsregardless ofinvestment returns ontrust. Employer is

responsible forensuring sufficientfunding to paypromised benefit.

Generally insured byPBGC.

Employee bears theinvestment risk, whichcan result in higherinvestment returns or

the loss of previouslyaccumulated pensionbenefits.

By individualinvestment vehicle, if

any.


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- combine features of traditionaldefined benefit and defined contributionplan.

- defined benefit plansthat define benefits for each employee byreference to the amount of the employees

hypothetical balance.


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Cash balance plans are less costly to

employers than defined benefit plans.

Cash balance plans pay out benefits in alump sum instead of a series of payment.


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covers the cost of avariety of services that promote soundphysical and mental health, including physicalexaminations, diagnostic testing, surgery,

hospitalization, psychotherapy, dentaltreatments and corrective prescription forlenses for vision deficiencies.

- specifies the amount of

money the insurance company will pay forsuch particular services such as physicalexaminations.


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- more than one partyis responsible for covering the cost of healthcare, including the government, employers,labor unions, employees or individuals not

currently employed.

government regulates

the health care system and uses taxpayersdollars to fund health care.


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the amount paid by the employersto insurance companies, to establish andmaintain insurance policies.

Insured refers to employees covered by theinsurance policy.


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The single payer system is referred to asuniversal health care systemsbecause thegovernment ensures that all of its citizenshave access to quality health care regardless

of ability to pay.


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- extends benefit only to thecovered employee.

- offers benefits to thecovered employee and his or her familymembers as defined by the plan.

- extends coverage to agroup of employees and their dependentsunder a single master contract.


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Provides protection against health careexpenses in the form of a cash benefit paid tothe insured or directly to the health careprovider after the employee has received

health care services.

Pay benefits on a reimbursement basis.


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Two types of fee-for- service plans:

based on a contract between the employer

and an insurance company.

- operates in the same fashion as indemnityplans.


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In Indemnity plans, Insurance companies paybenefits from their financial reserves, whichare based on the premiums companies andemployees pay to receive insurance.

In self- fund insurance, such companies paybenefits directly from their own assets, either

current cash flow, or funds set aside inadvance for potential future claims.


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Features of Fee-for-Service Plans

Deductable

Coinsurance

Out-of-Pocket Maximum

Pre existing Condition Clauses

Pre admission Certification

Second Surgical Opinions

Maximum Benefit Limits


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Emphasize Cost Control by limitingemployee's choice of doctors and hospitals.

Health Maintenance Organization(HMOs),Preferred Provider Organization(PPOs), Point-of-service(POS plans)


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Provides prepaid medical services for allmedically necessary services, only if theservices are delivered or approved by theHMO.


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Features of Health Maintenance Organizations

Out-of-pocket maximums

Pre existing condition clauses

Preadmission Certifications Second Surgical Opinions

Maximum benefits limit

Primary Care Physicians

Copayments

types of defined contribution plans

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