03. Qualified Plan Overview

Question 1

Identify the following acronym

“ERISA”

Answer 1

Employee Retirement Income Security Act

Question 2

What is the purpose of ERISA?

Answer 2

• ERISA is that law that sets forth the rules and regulations for qualified plans such as pensions and retirement benefits.
• ERISA also sets forth rules on disclosure, reporting, standards for fiduciaries, vesting, minimum benefits and provides for pension plan termination insurance, as afforded by the Pension Benefit Guarantee Corporation.
• Congress enacted ERISA in 1974 to provide protection for an employee’s retirement assets, both from creditors and from plan sponsors

Question 3

Identify the employer-sponsored plans which are considered tax-sheltered retirement arrangements.

Answer 3

• 403(b)
• SEPS

Question 4

Describe a

“Qualified Plan”

Answer 4

• A qualified plan will always possess the characteristics of either a pension plan or a profit-sharing plan with the characteristics of either a defined benefit plan or a defined contribution plan.
• Once a plan has achieved qualified status, the plan sponsor and the participants will benefit from tax deferral, asset protection, and several other advantages

Question 5

Identify the

“2020 Covered Compensation”

Answer 5

$285,000

Question 6

Identify the

“2020 Defined Benefit Maximum Limit”

Answer 6

$230,000

Question 7

Identify the

“2020 Defined Contribution Maximum Limit”

Answer 7

$57,000

Question 8

Identify the

“2020 401(k) Plan Deferral Limit”

Answer 8

$19,500

Question 9

Identify the

“2020 Highly Compensated Employee Limit”

Answer 9

$130,000

Question 10

Identify the

“2020 Key Employee Limit”

Answer 10

$185,000

Question 11

Identify the

“2020 Social Security Wage Base”

Answer 11

$137,700

Question 12

Identify the four types of Pension Plans

Answer 12

• Under Defined Benefit Pension Plans
  
  • Defined Benefit Pension Plans
  • Cash Balance Pension Plans
• Defined Contribution Pension Plans
  
  • Money Purchase Pension Plans
  • Target Benefit Pension Plans

Question 13

Identify the 7 Profit-Sharing Plans

Answer 13

• Profit-sharing Plans
• Stock Bonus Plans
• Employee Stock Ownership Plans
• 401(k) Plans
• Thrift Plans
• New Comparability Plans
• Age-based Profit-sharing Plans

Question 14

What are the primary differences between a

Defined Benefit and a Defined Contribution Plan?

Answer 14

• The assumption of the investment risk
• The allocation of plan forfeitures
• Coverage under the Pension Benefit Guaranty Corporation (PBGC)
• The calculation of the accrued benefit or account balance
• The availability to grant credit to employees for prior service

Question 15

Describe what a Defined Contribution Plan must offer an employee.

Answer 15

The defined contribution plan must offer a choice of at least three investment options, other than employer securities, each of which must be diversified and have materially different risk and return characteristics (e.g., a money market fund, a bond fund, and a stock fund).

Question 16

Describe Qualified Plans

Answer 16

• QP offer tax advantages to both employers and employees
• QP’s are meant to protect the rank-and-file employees
• The government was to prevent employers to adopt plans that solely benefit the owners and executives of the company
• A QP is costly, in bother operational costs and contributions, along with the compliance requirements.

Question 17

How are contributions to a QP treated by the IRS?

Answer 17

• An employer may deduct an amount up to 25 percent (or as actuarially determined for defined benefit plans) of the total covered compensation paid to its employees as a contribution to a qualified plan.
• The employer will immediately have a deductible expense for income tax purposes, but the employee will not have taxable income related to the plan contribution until the funds are later distributed from the plan.

Question 18

Describe Payroll Taxes

Answer 18

• An employee who receives compensation for services rendered to an employer also incurs payroll taxes equal to 6.2 percent for Old Age Survivor and Disability Insurance (OASDI) on compensation up to $137,700 for 2020 and 1.45 percent for Medicare tax on 100 percent of the employee’s compensation.
• The employer is also required to match any payroll taxes paid by the employee, creating a combined total payroll tax of 12.4 percent for OASDI up to $137,700 and 2.9 percent for Medicare on 100 percent of employee compensation.
• When the employer makes a contribution to a qualified retirement plan on behalf of its employees, the employer’s contribution is not subject to payroll tax even though the contribution was on account of services rendered.

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• Note that even at the time distributions are taken from the qualified profit-sharing plan, the distributions will not be subject to any payroll taxes.

Question 19

What is the downside to deferring taxes today?

Answer 19

• By deferring taxes today, an employee saves current income tax but gives up favorable tax treatment on dividends and capital gains.
• For most employees, dividends and capital gains will be a large part of their earnings on funds used for retirement.

Question 20

Define

Anti-Alienation Protection

Answer 20

• Anti-alienation protection prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings while the assets remain in the qualified retirement plan.
• Assets in a retirement plan covered by ERISA can only be seized to pay federal tax liens.
• This protection is to ensure that the individual has income during retirement.

Question 21

When are assets from a Qualified Plan no longer protected?

Answer 21

• Qualified retirement plan assets are not protected from alienation due to:
  
  • a qualified domestic relations order (QDRO - a court order related to divorce, property settlement, or child support)
  • a federal tax levy
  • from a judgment or settlement rendered upon an individual for a criminal act involving the same qualified plan.
• Once funds are distributed from a qualified retirement plan, the distributed assets are no longer protected by ERISA

Question 22

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Answer 22

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