6 - Profit-Sharing Plans and Money Purchase Plans

Question 1

While the internal revenue service does not require a profit-sharing plan to include a definite contribution formula for qualification, it is necessary that a profit-sharing plan include a _________ to become qualified

Answer 1

definite allocation formula

Question 2

The maximum deductible contribution for profit-sharing plans is ________ or otherwise accrued during the employer’s taxable year for years beginning after 2001 as a result of the ______

Answer 2

25% of the compensation paid

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Question 3

Are money purchase pension plans required to provide the joint-and-survivor options?

Answer 3

Yes

Question 4

may profit-sharing plan participants withdraw any portion of their vested benefits in the plan prior to separation from service with their employer?

Answer 4

Yes - but accumulations cannot be distributed in less than two years

Question 5

If a profit sharing plan is terminated (by the employer), all assets in the fund _____

Answer 5

vest immediately for the plan participants.

Question 6

if a money purchase pension plan involves after-tax employee and matching employer contributions, an ________ test must be satisfied each year in accordance with the terms of irc section 401(m).

Answer 6

actual contribution percentage (ACP)

Question 7

Employee loans are treated as taxable distributions unless (4) requirements are met.

Answer 7

• • amount of the loan
• • the agreement concerning loan terms
• • repayment period
• • employee’s vested interest and account balance

Question 8

Are employees permitted to take loans or to receive distributions from their money purchase pension plan accounts while still working for the plan sponsor (employer)?

Answer 8

no (at least it is very unusual)

Question 9

Defined benefit plans generally are prohibited from having more than ____ of their assets invested in qualifying employer securities.

Answer 9

10%

Question 10

Employee forfeitures occur in a profit-sharing plan when employees terminate with ______

Answer 10

less than full vesting.

Question 11

Because they technically are pension plans, money purchase plans are treated for many purposes as _____

In other ways though, they are treated as defined contribution arrangements. ______ must be maintained for employees; the plans are subject to the _______ of Section 415 of the IRC; and they are not subject to the plan ______ provisions of Title IV of ERISA.

Answer 11

• defined benefit plans
• Individual accounts
• annual addition limits
• termination

Question 12

Money purchase plans have many of the same basic characteristics that are found in all ________

Some of the more specific or typical characteristics of money purchase plans are as follows:

• (a) In establishing the plan, the employer agrees to make a ______ each year for each eligible employee.
• (b) The plan may require employees to make contributions to participate. If so, these contributions can be made only from _______—that is, salary reductions or elective deferral contributions cannot be made under a money purchase plan.
• (c) Both employer and employee contributions are transferred to a ______ (or an insurance company under a group annuity type of contract), where they are invested on behalf of the employees.
• (d) _______ are established for participating employees. Each is credited with employer and employee contributions, reallocated forfeitures (if applicable), and its proportionate share of investment gains and losses.
• (e) Employees frequently are given a choice of several investment funds in which to invest their account balances.
• (f) An employee’s benefit, at any given time, is whatever can be provided by his or her ______ at that time.
• (g) The employee’s account balance (even if not otherwise vested) usually is payable in full in the event of _______

(important)

Answer 12

defined contribution plans

• fixed contribution
• after-tax income
• trustee
• Individual accounts
• vested account balance
• the employee’s death.

Question 13

The discretionary approach to making contributions to a profit-sharing plan is advantageous in that it provides _______

Answer 13

contribution flexibility.

Question 14

The advantages of using a definite predetermined formula (for profit sharing plan) are that such a formula raises _______ and _______

Answer 14

employee morale and feelings of security

Question 15

is a definite predetermined contribution formula required in a profit-sharing plan in order for the plan to be qualified under the irc?

Answer 15

no

Question 16

(3) typical coverage requirements in a profit-sharing plan

Answer 16

• • don’t favor highly compensated employees (HCEs)
• • few impose age requirement
• • almost all specify service requirement

Question 17

if the vesting schedule in a qualified profit-sharing plan is changed, any participant with at least ___ years of service must be given the election to remain under the preamendment vesting schedule.

Answer 17

three

Question 18

Are employees permitted to make before-tax contributions to a money purchase pension plan?

Answer 18

No

Question 19

The three basic profit-sharing plan approaches are as follows:

Answer 19

• Current (cash)
• Deferred
• Combination

Question 20

Plan sponsors may use employee forfeitures either to ______ or may reallocate the forfeitures among remaining ______. They usually chose _____

Answer 20

• reduce employer contributions
• plan participants
• to reallocate to plan participants

Question 21

Qualification of profit-sharing plans for tax exemption under section 401 of the internal revenue code is restricted to _____ or ______ type plans.

Answer 21

deferred

combination

Question 22

A plan sponsor may receive statutory relief from liability for poor investment choices by plan participants by complying with regulations issued by DOL. These regulations generally require that a plan offer: (2)

Answer 22

• At least three diversified categories of investment
• Right to change investments at least quarterly (more often if needed because of the volatility of a particular fund.)

Question 23

In the case where both a pension plan (defined benefit or money purchase) and a profit- sharing plan exist, with overlapping payrolls, the total amount deductible in any taxable year for both plans together cannot exceed ___ of the compensation paid or accrued to covered employees for that year.

Answer 23

25%

Question 24

A pension plan to which employers and employees make contributions based on a percentage of annual earnings, in accordance with the terms of the plan. Upon retirement, the total pool of capital in the member’s account can be used to purchase a lifetime annuity.

Answer 24

money purchase plan

Question 25

Under this approach, profits are credited to employee accounts to be paid at retirement or other stated dates or circumstances (for example, disability, death, severance or under withdrawal provisions).

Answer 25

Deferred proft-sharing plan

Question 26

Because a **profit-sharing plan** must be for the exclusive benefit of employees and their beneficiaries in order to qualify under the Internal Revenue Code (IRC), coverage requirements must not result in discrimination in favor of \_\_\_\_\_. Relatively few profit-sharing plans impose a minimum age requirement, whereas almost all specify a ________ for participation. The IRC permits a minimum age requirement of up to age ___ and a service requirement of up to one year or two years if the plan provides for full and immediate vesting and is not a cash or deferred arrangement.

Answer 26

highly compensated employees (HCEs) service requirement 21

Question 27

A **profit-sharing plan** need *_not_* include a definite predetermined contribution formula as a condition for qualification under the IRC. It is not even necessary that contributions be based on profits. However, in the absence of a predetermined contribution formula, ________ contributions must be made to fulfill the requirement of plan permanency.

Answer 27

“substantial and recurring”

Question 28

In general, most profit-sharing plans do not have difficulties passing the nondiscrimination-in-contributions requirements because **profit-sharing plans** usually allocate contributions on the basis of a ________ of pay with the same vesting schedule and years-of-service definition applying to all participants.

Answer 28

uniform percentage

Question 29

Is there a maximum repayment period for loans from a qualified **profit-sharing plan?** Loans must be repaid within ___ years, have substantially level _______ and have **payments** that are made at least _______ . If the loan is used to acquire a principal residence of the participant and meets the amount limitation, the _______ does not apply. (important)

Answer 29

1. **5** 2. **amortization** 3. **quarterly** five-year time limit

Question 30

When the contribution in one taxable year is greater than the deductible limit for such taxable year, carryover provisions apply. This type of carryover is called a \_\_\_\_\_\_\_\_. If a contribution is made in a given year in excess of the allowable deduction for that year, the employer is allowed to deduct such excess payment from the amount of contribution in a ______ taxable year if it does not bring the deduction for the succeeding year to over 25% of the participating payroll for such succeeding year. The carryover provision notwithstanding, any excess contribution is subject to a ___ penalty tax.

Answer 30

* “contribution carryover.” * succeeding * 10%

Question 31

If a **profit-sharing** participant invests in life and health insurance with funds that have accumulated for **less than two years**, additional IRS requirements must be met. IRS requires that amounts used to purchase life or health insurance be \_\_\_\_\_\_\_. IRS has defined this as being one of the following: * (a) If only **ordinary life** insurance contracts are purchased, the aggregate premiums in the case of each participant must be less than _____ the total contributions and forfeitures allocated to his or her account. * (b) If only **accident and health insurance** contracts are purchased, the payments for premiums may not exceed ___ of the funds allocated to the employee’s account. * (c) If **_both_** ordinary life and accident and health insurance contracts are purchased, the amount spent for the accident and health premiums plus one-half of the amount spent for the ordinary life insurance premiums may not, together, exceed \_\_\_% of the funds allocated to the employee’s account.

Answer 31

* “incidental” * one-half * 25% * 25