4 Qualified Plans Flashcards
5 Limits with Contributions to DC Plans
- Max includible comp $345K™
- Defined contribution limit: $69K™ (or ≤ 100% of comp)
- Elective deferrals: $23K™ (or ≤ 100% of comp)
- Catch-up contribs $7.5™
- Max employer contribution across all employees: 25% of covered payroll
$69K limit includes employer contribs, employee contribs (“elective deferrals”), and reallocated forfeitures. Does NOT include catchup contributions or account earnings/growth.
How much stock can DC pension plans invest in?
≤ 10%
(100% for DC profit-sharing plans)
CODA
Cash or Deferred Arranagement
Age to make catchup contribution to a qualified plan
- age 50
- applies to profit-sharing plans, 403(b), 457(b), IRAs, & Roth IRAs
Which qualified plans get PBGC insurance?
Pension Benefit Guaranty Corporation (PBGC) Insurance - protects pension benefits for participants in private-sector Defined Benefit (DB) plans
Which qualified plans are required to have a QJSA?
Qualified Joint Survivorship Annuity - ensures that a surviving spouse continues receiving benefits after the participant’s death. Required for pension plans (DC pension plans or all DB plans)
Which qualified plans have participant-directed accounts?
all Defined Contribution (DC) plans
Rules for 401(k) loans
- amount max?
- term max?
- Max balance ≤ $50K and ≤ acct balance
- Max repayment period of 5 yrs (unless for securing primary res)
Money-Purchase Pension vs Target Benefit Pension
Mandatory employer contribution…
* Money-Purchase - Usually % of salary
* Target Benefit - Based on one-time only in first year actuary based on age at plan entry (this is most similar to DB Plans)
Contribs to which plans are considered “active participation” for purposes of determining deductibility of IRA contributions?
everything but 457 plans
What is a “Fully Insured” Traditional DB Plan?
Funded exclusively by cash value life insurance or annuity contracts
Difference between…
- Traditional DB Pension Plan
- Cash Balance Plan
- Trad DB Pension Plan guarantees final monthly pension amount
- Cash Balance Plan guarantees a specific cash balance
Which qualified plans guarantee the final benefit?
only DB plans
Contrib & distrib limits for DB plans?
- Contribs: Max $345K™ included in benefit formula (same as DC plans) (“maximum includible compensation™”) but no limit on employer contribs (not even the 25% thing!)
- Distribs: Max $275K™ annual pension (“defined benefit limit™”)
Vesting for Defined Contribution (DC) Plans
Vesting at least as generous as 3-year cliff, or 2-6-year graded
includes DC pension plans (Money Purchase Pension)
Vesting for Defined Benefits (DB) Plans
- Trad DB Plan: at least as generous as 5-year cliff or 3-7 year graded
- Cash Balance Plan: 3-year cliff
Do DB plans have separate participant accounts?
- Trad DB Pension: No
- Cash Balance: Only “hypothetical” accts for record-keeping (since have to track cash balance at plan retirement age)
Trad DB Pension vs Cash Balance Pension
Trad DB Pension
* Guarantees monthly pension
* Common formula is % of pay times yrs of service”
* Expensive, complicated, for older employees; can have substantial funding for older EEs
Cash Balance Pension
* Guarantees cash balance at normal retirement age, which can be converted to a lifetime pension
* Each year participant accrues a plan contribution based on a “pay credit” (% of comp) plus an “interest rate credit” (return on pre-existing balance
* Easier to understand than Trad DB Pension Plan
remember:
- traditional = older & more complicated
- cash balance = have a cash balance at normal retirement age
Which qual. plans don’t get their own FDIC coverage?
- 401(k)s & pensions are NOT separately insured under the FDIC retirement category unless self-directedª
- all IRAs are their own category, at $250K coverage PER BANK
Qualified Plan Nondiscrimination Testingª
A qualified plan MUST meet one of the following three benefit tests:
1. The Safe Harbor Test – plan must cover at least 70% of the non-highly compensated employees
2. The Ratio Percentage Test - plan must cover a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees covered
3. The Average Benefits Test – the percentage of benefits received by non-highly compensated employees must equal at least 70% of the percentage of benefits received by highly compensated employees
who is a Highly-Compensated Employee (HCE) for a qualified plan?
Either:
1. Compensation Test: Earned > $155K in the prior year;
2. Ownership Test Owns ≥ 5% of the business at any time during the year or the preceding year
Other notes:
- Relation to owners might also consider you a HCE
- Top 20% Election: Employers can elect to limit HCEs to the top 20% of employees based on compensation, reducing the number of HCEs.
Qualified Plan Social Security Integration
- why?
allows employers to adjust retirement benefits to account for Social Security taxes.. benefits high earners who receive a smaller percentage of their income from Social Security.
Excess Integration vs Offset Integration for Qualified Plans
- how much more can contribute?
“Excess” adds increased benefits after integration level (SS wage base or could be smaller), “Offset” decreases benefits below integratoin level.
Excess Integration (DB or DC Plans) – an additional contribution rate is applied to compensation above the integration level, up to the qualified plan-covered compensation limit.
Offset Integration (Only DB Plans) - A fixed or formula amount reduces the plan formula to represent the existence of SS retirement benefits.
Can contribute 2x contrib % up to 5.7% max
Top-Heavy Qualified Plansª
- what qualifies?
- who are key employees
- consequences?
Top-heavy if > 60% of the aggregate accrued benefits (DB) / aggregate account balances (DC) belong to key employees.
Key employees are officers or owners of your business who at any time during the year before your testing date were:
- Officers with earnings of more than $220,000 (2024)
- Owners of more than 5% of the business, or
- Owners earning over $150,000 (not adjusted for inflation) and holding more than 1%.
Consequences
Must use accelerated vesting (2-6 year graded or 3-year cliff vesting & must provide minimum benefits to non-key employees of:
- DB: 2% of comp for each year of service up to 10 years
- DC: ER contrib of 3% of covered comp or at least equal to the key employee contribution rate
Solo 401(k) Plan
- aka?
- rules?
- aka Solo-k, Uni-k, One-participant k
- Same rules as regular 401k (have to make SE adjustments and make special consideration of rule of 25% of covered comp if taking distributions from S-corp or partnership, which don’t count)
Qualified Plans can exclude workers who work [how much] per year?
< 1000 hrs
