7 - Foundations of 401(k) Plans

Question 1

In ____ Employers responded to the benefit planning opportunities created by Section 401(k), and significant 401(k) plan creation began.

Answer 1

1982

Question 2

For determining “immediate and heavy financial need,” the following events are acceptable: (4)

Answer 2

1. certain medical expenses by the employee,
2. purchase of the employee’s home
3. Payment of room and board, tuition and related educational fees for the next 12 months of postsecondary education
4. prevent eviction or foreclosure

Question 3

Elective contributions are considered as _____ for Social Security (and federal unemployment insurance) purposes. Thus, FICA taxes are paid on such amounts under the _______, and they are taken into account when calculating an employee’s Social Security benefits.

Answer 3

wages

taxable wage base

Question 4

From an employer’s viewpoint, CODAs have all the advantages normally associated with any ______

Answer 4

employee benefit plan.

Question 5

The treatment of elective contributions under state and local tax laws is ________

Answer 5

not completely uniform.

Question 6

In _____ IRS issued proposed regulations governing CODAs.

Answer 6

1981

Question 7

CODA disadvantages from the

• employer’s viewpoint:
• from employee’s viewpoint:

Answer 7

these plans involve complex and costly administration.

not as great

Question 8

The ADP (Actual Deferral Percentage Test) test is a mathematical test that must be satisfied by the close of each plan year. The following steps are used in applying this test:

Answer 8

• Determine the ADP for each eligible employee (ADP = contribution deferred / compensation)
• Divide the eligible employees into two groups (highly compensated and not)
• avg ADP of these groups

Question 9

______ are employer contributions made to allow a plan to meet requirements and avoid the need for AdP testing. they must be fully vested and are subject to distribution restrictions.

Answer 9

Safe harbor contributions

Question 10

Qualified nonelective contributions (QNECs) are nonelective contributions to which two special rules apply:

• (1) the contribution must be ____ at all times, and
• (2) it generally may not be distributed to the employee on an in-service basis for any reason before the employee reaches the age of ____

Answer 10

• fully vested
• 591⁄2

Question 11

The value of all elective and any after-tax employee contributions to a _____ must be fully vested at all times.

Answer 11

CODA

Question 12

made many significant changes in the law related to defined contribution (DC) plans generally, with many of these changes having important implications for 401(k) plans.

Answer 12

The Pension Protection Act of 2006 (PPA)

Question 13

______ are employer contributions made on behalf of eligible employees regardless of whether they have made elective deferrals.

Answer 13

Nonelective contributions

Question 14

IRS has ruled that the inclusion (or exclusion) of _________ under a CODA as compensation in a defined benefit pension plan does not cause the pension plan to be discriminatory

Answer 14

elective contributions

Question 15

The regulatory safe harbor for the second requirement that the withdrawal be necessary to satisfy the financial need includes four conditions:

1. distribution must not exceed ________
2. employee must have obtained all _____
3. plan must provide that the employee’s elective and after-tax contributions will be suspended for at least ___ months after receipt of the distribution.
4. The plan and all other employer plans must limit the employee’s elective contributions for ______

Answer 15

• the amount of the need.
• distributions
• six
• the calendar year

Question 16

If excess contributions arise because of the ADP or ACP tests, there are several ways in which the problem can be addressed. (3)

Answer 16

• employer to make additional contributions necessary to satisfy the test requirements
• “recharacterize” the excess deferrals
• refund the excess contributions using the method prescribed in the regulations.

Question 17

Starting in 1999, a CODA plan sponsor could avoid nondiscrimination testing for elective contributions by using either one of the following safe harbors:

• (a) Providing matching contributions to NHCEs of: (1) At least 100% of the first ____ of pay contributed and 50% of the next 2% of pay contributed
• (b) Making a contribution of __ of compensation for all NHCEs, regardless of whether these employees contributed to the plan.

Answer 17

3% 3%

Question 18

_____ are amounts an employee authorizes the employer to contribute to a CodA on a pretax basis—either by way of salary reduction or through an election to defer.

Answer 18

Elective contributions

Question 19

_______ are increased elective deferrals permissible for employees who are at least aged 50 before the end of the tax year

Answer 19

Employee catch-up contributions

Question 20

Elective contributions previously affected the maximum deduction to qualified plans in two ways:

• 1) reduced the amount of the ______ to which the percentage limitations applied (reducing amount available as a max deduction)
• 2) considered to be ________ (reduced the amount otherwise available for the employer to contribute and deduct)

EGTRRA modified the definition of compensation beginning in _____ to allow greater employer deductible contributions. Elective deferrals to qualified cash or deferred arrangements, which were previously excluded from the definition of compensation, are now included. Also, elective deferrals to cash or deferred arrangements are no longer deemed employer contributions, and they are, therefore, not subject to the employer deduction limits.

Answer 20

• covered payroll
• employer contributions
• 2002

Question 21

Section 401(k) defines a qualified CODA as any arrangement that possesses the following characteristics:

• Is part of a _____ or _____ plan
• Allows covered employees to elect to have the employer make contributions to a _____ under the plan on behalf of the employees, or directly to the employees in _____
• Subjects amounts held by the trust that are attributable to employer contributions made pursuant to an employee’s election to certain specified withdrawal limitations
• Provides that accrued benefits derived from such contributions are ______

Answer 21

• profit-sharing or stock bonus
• trust
• cash
• nonforfeitable

Question 22

Excess deferrals caused by exceeding the elective deferral limit may be allocated among the plans under which the deferrals were made by ______ following the close of the taxable year, and the plan may distribute the allocated amount back to the employee by _______

Answer 22

• March 1
• April 15

Question 23

A CODA may be part of a profit-sharing or stock bonus plan. This, of course, includes savings plans. The only qualified, DC plan that cannot be established as a CODA is a ______ or _______.

Answer 23

post-ERISA money purchase or DC pension plan

Question 24

similar to the ADP test but applies to any after-tax employee contributions and any employer matching contributions.

Answer 24

ACP test (actual contribution percentage)

Question 25

in the case of plans operating within the confines of a CodA, the ability to make ____ withdrawals is severely \_\_\_\_\_. the value of elective contributions may be distributable only upon death, disability, separation from service, the termination of the plan (provided no successor plan other than an employee stock ownership plan or a simplified employee pension plan is established) or certain sales of businesses by the employer.

Answer 25

* in-service * limited

Question 26

The ADP test determines a maximum _____ for the entire group of HCEs. It does not necessarily indicate the maximum deferral percentage for a single individual in this group

Answer 26

average deferral percentage

Question 27

The regulations state that all amounts held by a plan that has a CODA will be subject to the _____________ unless a separate account is maintained for benefits specifically subject to these requirements.

Answer 27

CODA nonforfeitability and withdrawal requirements

Question 28

The basic test is that the ADP for HCEs cannot be more than ____ of the ADP for NHCEs.

Answer 28

125%

Question 29

From the viewpoint of employees, the first and foremost advantage of CODA involves \_\_\_\_\_

Answer 29

taxes

Question 30

If contributions are to be returned because of an excess contribution problem, there are two critical dates:

Answer 30

* 21⁄2 months after the end of the plan year in which the excess has occurred. * last day of the plan year following the plan year in which the excess occurred.

Question 31

For years prior to \_\_\_\_, compensation and deferrals for the current year were used both for NHCEs and HCEs. Beginning with that plan year, employers were allowed to conduct the ADP test using ADPs of NHCEs for the prior year.

Answer 31

1997

Question 32

ccordingly, 401(k) plans with an automatic enrollment feature can avoid nondiscrim- ination testing for both elective deferrals and matching contributions. To qualify for this safe harbor, deferrals must be at least __ of compensation in the participant’s first year of participation, and subsequently increase by one percentage point each year until the deferrals reach __ in the fourth year and remain at least at __ thereafter.

Answer 32

3% 6% 6%

Question 33

PPA also required that beginning after 2006 DC plans of publicly traded companies that hold publicly traded employer securities allow participants to __________ that are invested in employer securities.

Answer 33

diversify account balances

Question 34

The regulations define ______ in a very narrow way and require it be caused by “immediate and heavy financial needs” of the employee. Further, they require that the withdrawal must be necessary to satisfy the financial need.

Answer 34

hardship

Question 35

The method of funding any type of qualified profit-sharing or stock bonus plan. Allow employees to contribute a portion of their salaries to the plan so that their savings can grow tax-deferred.

Answer 35

Cash Or Deferred Arrangement - CODA

Question 36

The Revenue Act of 1978 enacted permanent provisions governing CODAs by adding ______ to the Internal Revenue Code. In _____ employers responded to the benefit planning opportunities created by Section 401(k), **and significant 401(k) plan creation began.**

Answer 36

Section 401(k) 1982

Question 37

a mathematical test that must be satisfied **by the close of each plan year.**

Answer 37

ADP Test

Question 38

If a **money purchase pension plan** involves *after-tax* employee and matching employer contributions, an _______ must be satisfied each year in accordance with the terms of IRC Section 401(m). The test also applies to voluntary after-tax employee contributions even when there is no \_\_\_\_\_\_. This test limits the participation of _____ so that their average contribution percentages cannot exceed the average contribution percentages of the NHCEs by more than a stipulated amount.

Answer 38

actual contribution percentage (**ACP**) test employer match HCEs

Question 39

Starting in 1999, a CODA plan sponsor could avoid nondiscrimination testing for elective contributions by using either one of the following safe harbors: * (a) Providing matching contributions to NHCEs of: * (1) At least 100% of the first 3% of pay contributed and 50% of the next 2% of pay contributed * (b) Making a contribution of ____ of compensation for all NHCEs, regardless of whether these employees contributed to the plan.

Answer 39

3%

Question 40

***ACP*** testing is not required for __________ (though the ACP test still is required for after-tax employee contributions) if: (2) * (1) The plan provided for a ______ matching contribution. * (2) No match was provided on contributions in excess of \_\_% of compensation.

Answer 40

* matching contributions * safe harbor * 6%

Question 41

Distributions of **elective contributions** are permitted after the employee has attained the age of ____ or before this age in the case of a hardship. For hardship withdrawals, however, the amount available is limited to the elective contributions themselves; investment income on such contributions can be included only to the extent that it was earned prior to \_\_\_\_\_\_

Answer 41

* 591⁄2 * December 31, 1988