Administration of Qualified Plans (Lesson 3) Flashcards
What are the three options that an individual has if they have a pension plan and terminates employment before normal retirement age
- receive a lump sum distribution of the qualified plan assets
- roll the assets over to an IRA or other qualified plan
- leave the funds in the pension plan
What is a forced payout from a pension plan
- if the vested account balance is less than $5,000 then the plan may distribute the balance to the participant if the participant does not make a timely election
- if between $1,000 and $5,000 it will be directly rolled to an IRA if the proper election is not made
What is the normal distribution at retirement age for a pension plan
- single life annuity
- married individuals must be offered a qualified joint and survivor annuity
What is a Qualified Joint and Survivor Annuity for married individuals
- pays a benefit to the participant and spouse as long as either lives
- at death of first spouse the surviving spouses annuity payments can range from 50% to 100% of the joint life benefit
What can a non participating spouse do before a QJSA starts
- may choose to waive their right to the QJSA by executing a notarized or otherwise official waiver of benefits
- may be made during the 90 day period beginning 90 days before the annuity start date
- nonparticipating spouse must sign the waiver
What is a Qualified Pre Retirement Survivor annuity (QPSA)
- provides a benefit to the surviving spouse if the participant dies before attaining normal retirement age
- Nonparticipant spouse is offered the QPSA and may choose whether to accept or waive the option (Waive via a written notarized waiver)
- full value of the distribution under the QPSA is subject to ordinary income tax in addition to estate tax
When does a pension or profit sharing plan not have to provide a QJSA or QPSA
- if the benefit is payable to the surviving spouse upon the participants death
What is the problem with rolling over a pension plan into another qualified plan or an IRA
- if the participant is able to receive favorable tax treatment on a lump sum distribution (NUA, 10 year forward averaging, or pre 74 capital gain treatment) these favorable tax treatments will be lost
How does a participant take a distribution from a profit sharing plan at termination
- can take distribution as ordinary taxable income, annuitize the value of the account (if permitted), or roll the assets over into a rollover qualified plan or IRA
When is a plan custodian required to withhold a mandatory 20%
- distribution from a qualified plan
When is distribution from a retirement plan not subject to 20% withholding
- hardship distributions from a qualified plan
- loan from a qualified plan
- distributions from IRAs
What is a direct rollover
- occurs when the plan trustee distributes the account balance directly to the trustee of the recipient account
- Not required to withhold 20%
What is a indirect rollover
- occurs through a distribution to the participant with a subsequent transfer to another account
- 20% withholding required
- to complete the rollover the participant must then reinvest the full original account balance of the qualified plan including the 20% withholding amount with 60 days
When will a participant have an adjusted basis in distributions received from a qualified plan
- participant made after tax contributions to a contributory qualified plan or
- participant was taxed on the premiums for life insurance held in a qualified plan
How is the taxable/nontaxable portion of an annuity payment figured
- using the exclusion ratio
- Cost basis in annuity/Total expected benefit= Exclusion ratio
What is the formula for exclusion ratio
- Cost basis in the annuity/Total Expected Benefit = Exclusion ration
- This will tell you how much is not taxable
What are the four requirements that a distribution must meet to be considered a lump sum distribution
- Distribution must represent the employees entire accrued benefit/balance in the case of a pension plan or defined contribution plan
- must be on account of either the participants death, attainment of age 59 1/2, separation of service, or disability
- must have participated in the plan for at least five taxable years prior to the tax year of distribution (waived if because of death)
- taxpayer must elect lump sum distribution treatment by attaching form 4972 to the taxpayers federal income tax return with in one year of distribution
What special tax treatments can a lump sum distribution qualify for
- 10 year forward averaging
- Pre 1974 capital gains treatment
- NUA treatment
What is the 10 year forward averaging for lump sum distribution
- participant born before 1/2/1936 in order to be eligible
- the income tax due on a lump sum distribution is calculated by dividing the taxable portion of the lump sum distribution by 10 and then applying the 1986 individual income tax rate
- this result is then multiplied by 10 to determine the total income tax due on the distribution
- tax is paid in the year of the lump sum
What is the pre-1974 capital gain treatment for lump sum distribution
- Participant must be born before 1/2/1936
- May be eligible to receive capital gain tax treatment on the portion of a lump sum distribution that is attributable to pre 1974 participation in a qualified plan
What is the Net Unrealized Appreciation (NUA) that can be applied to a lump sum distribution
- distribution must be of employer stock
- capital gain tax treatment on the NUA portion of the distribution as well as a deferral of recognition of gain
- defined as the excess of the FMV of the employer securities at the date of the lump sum distribution over the cost of the employer securities at the date the securities were contributed to the qualified plan
- deferred gain is treated as either ST or LT depending on holding period that begins on the date of the distribution
What are the issues involved with a NUA distribution
- participant must qualify for a lump sum distribution treatment
- NUA portion must be relatively high in comparison to the cost basis portion
- investment risks of holding the securities
- Cash flow considerations must be evaluated to determine the impact of holding the securities vs. selling the securities
How are inherited securities with NUA taxed
- the inherited stock will received an adjustment of basis to FMV at date of death less any unrecognized NUA
- NUA portion retain LT capital gain rates
- Any gain above the date of death value will be taxed based on the beneficiaries holding period
What is a qualified domestic relations order (QDRO)
- is an order, judgement, or decree pursuant to a state domestic relations law that creates or recognizes the right of a third party alternate payee to receive benefits from a qualified plan
What are the two basic approaches that may be used to divide the benefit depending on the reason the QDRO is being used
- first is the shared payment approach, which splits the actual benefit payments made between the participant and the alternate payee
- second is the separate interest approach, which divides the participants retirement benefit into two separate portions
Are distributions because of a QDRO considered a taxable distribution
- no as long as the assets are deposited into the recipients IRA or qualified plan
What is the penalty for a taxable distribution from a qualified plan before attaining 59 1/2
10% penalty
What are the exceptions to the 10% penalty from a qualified plan
(MESS AT DQ)
- death
- attainment of age 59 1/2
- disability
- substantially equal periodic payments (72t)
- medical expenses that exceed 7.5% of AGI
- $5,000 per taxpayer for birth or legal adoption
- QDRO
- Qualified public safety employee who separates from service after age 50
- attainment of 55 and separation from service
In order for payments to be considered substantially equal under 72t what are the three ways that will qualify
- required minimum distribution method
- fixed amortization method
- fixed annuitization method
What is the RMD method under 72t
- payments are calculated in the same manner as RMD rules (recalculated annually)
What is the fixed amortization method under 72t
- payment is calculated over the participants life expectancy if single, or joint if married
- method creates a series of installment payments that remain the same in subsequent years
What is the fixed annuitization method under 72t
- participant takes distributions of the account over their life expectancy as determined by dividing the account balance by an annuity factor using a reasonable interest rate and mortality table
- payment does not change in future years
How long must payments continue under 72t
- must continue under the later of five years from the date of the first payment or the participants attaining age 59 1/2
What happens if payments change when a 72t election has been made
- participant will be considered to have made a distribution equal to the full account balance of the qualified plan in the first year of the substantially equal periodic payment
What are four additional ways the 10% penalty can be avoided for distributions form a qualified plan (E,T,M,Q)
- if the distributions are dividends paid within 90 days of the plan year end from a ESOP
- distribution is made to pay certain unpaid income taxes because of a tax levy on the plan
- Distribution is made for medical expenses paid during the year greater than 7.5% of the participants AGI (whether the itemize or not)
- distribution is pursuant to a QDRO
How do IRAs avoid the 10% penalty for a early distribution
(HIDE ME)
- First time home purchase
- health insurance
- death and disability
- higher education
- medical expenses
- equal periodic payments
Can you take a penalty free distribution from a qualified plan to pay for education
- No that is only an exception for a IRA
At what age are RMDs required from a plan
- 70 1/2 if they reach that age before 12/31/19
- 72 if after that date
What happens if an RMD is not taken
- 50% excise tax will be levied on the RMD
- penalty is an amount equal to the RMD less any distribution that was taken but the result cannot be less than zero
Do RMDs apply to Roth 401ks
Yes
Do RMDs apply to 457 plans
Yes
When is the first RMD required to be taken
- by April 1st of the year following the attainment of age 72
- Each year after must be taken by year end
How is the RMD amount calculated
- determined each year by dividing the account balance as of close of business 12/31 of the year preceding the distribution year by the distribution period determined according to participants age as of 12/31
What happens if a participant is still employed by the employer of the qualified plan past the RMD age
- RMDs do not have to being until April 1 following retirement
Which table is used to calculate the RMDs for a participant with a spouse that is not 10 years younger
Uniform lifetime table
What happens if a participant has multiple qualified plans? Multiple IRAs?
- minimum distribution must be taken from each qualified plan in which the taxpayer has an account balance
- taxpayers are permitted to combine the value of all of their IRAs and then taken from any accounts
(Effects of Participants Death on RMD)
Death after beginning RMDs (Prior to 12/31/19)
- Calculation of subsequent RMDs uses the designated beneficiaries life expectancy factor as determined on the last day of the year following the year of participants death
- then reduced by 1 in each succeeding year
- if more then one beneficiary the shortest life expectancy is used if not divided into separate accounts
(Effects of Participants Death on RMD)
Death after beginning RMDs (Prior to 12/31/19) and trust is named
The beneficiaries will be treated as the designated beneficiaries provided:
- the trust is valid under state law
- trust is irrevocable or will become so upon the participants death
- trusts beneficiaries are identifiable from the trust instrument and
- appropriate documentation has been provided to the plan administrator
What happens if the spouse is the beneficiary of the qualified plan and the participant dies
- surviving spouse can receive distributions over the single life expectancy
- if the spouse is the sole bene they can rollover the plan balance to their own account and wait until they turn RMD age
What happens if their is no beneficiary of the qualified plan and the participant dies
- distributions must continue over the remining distribution period of the deceased owner
- remaining distribution period is reduced by one each year
(Effects of Participants Death before RMD)
Death before RMDs (Prior to 12/31/19) and spouse is named designated beneficiary
- Spouse can receive distributions over the participants remaining single life expectancy recalculated each year under the single life table
- Distributions must begin in the year which the owner would’ve attained age 70 1/2
- if they are sole beneficiary they can roll over the balance into their own account and wait till they turn 70 1/2
- spouse can also elect to distribute the entire account balance within 5 years after the year of the owners death
(Effects of Participants Death before RMD)
Death before RMDs (Prior to 12/31/19) and nonspouse is named designated beneficiary
Beneficiary has two options:
- the remaining single life expectancy (not recalculated) of designated beneficiary (reduced by one each year)
- Beneficiary can elect to distribute the entire account balance or rollover the balance within 5 years after the year of the owners death
(Effects of Participants Death before RMD)
Death before RMDs (Prior to 12/31/19) and no beneficiary is named
- Must be fully distributed before the end of the 5th year following the year of death
(Effects of Participants Death After RMD)
Death after RMD (Prior to 12/31/19) and spouse is named designated beneficiary
- spouse can receive distributions over the surviving spouses remaining single life expectancy as recalculated using the single life table
- Rollover the plan to an IRA in surviving spouses name and delay distribution until spouse is 70 1/2
(Effects of Participants Death After RMD)
Death after RMD (Prior to 12/31/19) and nonspouse is named designated beneficiary
- distribution period is the longer of the remaining single life expectancy (not recalculated) of the designated beneficiary (reduced by one year) or the remaining life expectancy of the participant
- Rollover the plan balance to an IRA in nonspouse beneficiaries name and distribute over the longer of the remining single life expectancy of the beneficiary or the remaining life expectancy of the participant
(Effects of Participants Death After RMD)
Death after RMD (Prior to 12/31/19) and no beneficiary
- Distribution must continue over the remining distribution period of the deceased owner (uniform life table)
- decedents remaining distribution period is reduced by one each year
Who is the eligible designated beneficiaries for post 12/31/19 RMD rules
- Surviving spouse
- Child participant who has not reached age of majority
- disabled or chronically Ill individuals
- any other individual who is not more than 10 years younger than the participant
How can a eligible beneficiary distribute the assets from an inherited IRA
- can distribute the assets over their life expectancy
Who is a designated beneficiary under post 12/31/19 RMD rules
- is a listed beneficiary that does not meet the criteria of an eligible designated beneficiary
How must a designated beneficiary distribute the account balance from an inherited IRA
- must distribute the account balance by 12/31 of the year containing the 10th anniversary of the participants death
Who is a nondesignated beneficiary in post 12/31/19 RMD rules
- includes an estate, charity, and some trusts
Does it matter if RMDs have begun and a owner has died under the 12/31/19 rules
- No the rules are based on the type of beneficiary you are not whether the owners has died before RMDs have begun or not
(Owner dies before entire balance is distributed under RMDs post 12/31/19)
Beneficiary is a Eligible Designated Beneficiary
- May be distributed over the life expectancy of the eligible designated beneficiary beginning in the year following the year of death
- spouse can rollover to their IRA
- if child is minor at owners death they become a designated beneficiary when they reach the age of majority
(Owner dies before entire balance is distributed under RMDs post 12/31/19)
Beneficiary is a Designated Beneficiary
- Balance must be paid out within 10 years
(Owner dies before entire balance is distributed under RMDs post 12/31/19)
Beneficiary is a Non-Designated Beneficiary
Follow pre secure act rules:
After RMD
- use owners age as of birthday in year of death
- reduce beginning life expectancy by 1 for each subsequent year
- can take owners RMD for year of death
Before RMD
- take entire balance by end of 5th year following year of death
What is an important step to take when selecting a qualified plan
- Prepare a employee census
- will identify each employee, their age, compensation, number of years of employment, and any ownership interest
(Characteristics of Pension Plans)
Who Generally Contributes?
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Employer
Cash Balance Pension Plan: Employer
Target Benefit Pension Plan: Employer
Money Purchase Pension Plan: Employer
(Characteristics of Pension Plans)
Mandatory Funding?
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Yes
Cash Balance Pension Plan: Yes
Target Benefit Pension Plan: Yes
Money Purchase Pension Plan: Yes
(Characteristics of Pension Plans)
Investment Risk
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Employer
Cash Balance Pension Plan: Employer
Target Benefit Pension Plan: Employee
Money Purchase Pension Plan: Employee
(Characteristics of Pension Plans)
Company Stock %
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: <= 10%
Cash Balance Pension Plan: <= 10%
Target Benefit Pension Plan: <= 10%
Money Purchase Pension Plan: <= 10%
(Characteristics of Pension Plans)
Permits Social Security Integration
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Yes
Cash Balance Pension Plan: Yes
Target Benefit Pension Plan: Yes
Money Purchase Pension Plan: Yes
(Characteristics of Pension Plans)
Required Expert for Administration
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Actuary/Pension Expert
Cash Balance Pension Plan: Actuary/Pension Expert
Target Benefit Pension Plan: Actuary once/Pension Expert
Money Purchase Pension Plan: None
(Characteristics of Pension Plans)
Who is generally favored
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Older Entrants
Cash Balance Pension Plan: Younger Persons
Target Benefit Pension Plan: Older Age Entrants
Money Purchase Pension Plan: Younger Persons
(Characteristics of Pension Plans)
QJSA/QPSA
Defined Benefit Pension Plan
Cash Balance Pension Plan
Target Benefit Pension Plan
Money Purchase Pension Plan
Defined Benefit Pension Plan: Yes
Cash Balance Pension Plan: Yes
Target Benefit Pension Plan: Yes
Money Purchase Pension Plan: Yes
(Characteristics of Profit Sharing Plans)
Who Generally Contributes
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: Employer
Stock bonus plan: Employer
ESOP: Employer
401(k)/401(k)/Roth: Employee and Employer
Thrift Plan: Employee
Age Based Profit Sharing Plan: Employer
New Comparability Plan: Employer
(Characteristics of Profit Sharing Plans)
Investment Risk
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: Employee
Stock bonus plan: Employee
ESOP: Employee
401(k)/401(k)/Roth: Employee
Thrift Plan: Employee
Age Based Profit Sharing Plan: Employee
New Comparability Plan: Employee
(Characteristics of Profit Sharing Plans)
Company Stock %
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: Up to 100%
Stock bonus plan: Up to 100%
ESOP: Up to 100%
401(k)/401(k)/Roth: Up to 100%
Thrift Plan: Up to 100%
Age Based Profit Sharing Plan: Up to 100%
New Comparability Plan: Up to 100%
(Characteristics of Profit Sharing Plans)
Permits Social Security Integration
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: Yes
Stock bonus plan: Yes
ESOP: No
401(k)/401(k)/Roth: No
Thrift Plan: Yes
Age Based Profit Sharing Plan: Yes
New Comparability Plan: Yes
(Characteristics of Profit Sharing Plans)
Required Expert
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: None
Stock bonus plan: Valuation specialist and Pension expert
ESOP: Valuation specialist and Pension expert
401(k)/401(k)/Roth: Pension Expert
Thrift Plan: Pension Expert
Age Based Profit Sharing Plan: Pension Expert
New Comparability Plan: Pension Expert
(Characteristics of Profit Sharing Plans)
Who is generally favored
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: Highly Compensated and Younger Persons
Stock bonus plan: Highly Compensated and Long Length of Service
ESOP: Highly Compensated and Long Length of Service
401(k)/401(k)/Roth: Savers and Younger Persons
Thrift Plan: Savers and Younger Persons
Age Based Profit Sharing Plan: Older Highly Compensated
New Comparability Plan: Owners
(Characteristics of Profit Sharing Plans)
QJSA/QPSA
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: No
Stock bonus plan: No
ESOP: No
401(k)/401(k)/Roth: No
Thrift Plan: No
Age Based Profit Sharing Plan: No
New Comparability Plan: No
(Characteristics of Profit Sharing Plans)
Mandatory Funding
Profit Sharing Plan
Stock bonus plan
ESOP
401(k)/401(k)/Roth
Thrift Plan
Age Based Profit Sharing Plan
New Comparability Plan
Profit Sharing Plan: No
Stock bonus plan: No
ESOP: No
401(k)/401(k)/ Roth: No
Thrift Plan: No
Age Based Profit Sharing Plan: No
New Comparability Plan: No
Which pension plans favor younger entrants
- Cash balance pension plan
- Money purchase pension plan
What is a master or prototype plan for qualified plans
- follow a standard from
- pre approved by the IRS and are available for employers to simply adopt
What is a individually designed plan for qualified plans
- used for a company that has specific needs that are not addressed in a master or prototype plan
- in order to be considered a qualified plan the plan must be permanent and for the exclusive benefit of the employees and their beneficiaries
If a individually designed plan is selected what must the plan do in order to be a qualified plan
- must be permanent and for the exclusive benefit of the employees and their beneficiaries
What is a determination letter for a qualified plan
- may be used when a retirement plan is adopted, amended, or terminated
- are issued by the IRS at the request of the plan sponsor
- Plan sponsor is not required to request a determination letter
Can a qualified plan still be disqualified if a determination letter is requested and approved
- Yes the IRS may still disqualify the plan
Is a plan sponsor required to request a determination letter from the IRS
- No the plan sponsor requests it but is not required too
What must an employer do before the IRS can issue a determination letter on the qualified status of a retirement plan
- the employer must provide the IRS with satisfactory evidence that it has notified the persons who qualify as interested parties
How can notice be made to an eligible employee about a qualifying plan
- in person, via email or mail, or by posting a notice in a location generally used for posting notices to employees
What is the employer required to give the employee about the qualified plan
- to provide, free of charge, a summary of the details of the qualified retirement plan called a Summary Plan Description
- notice of any plan amendments or changes
- must automatically provide the participants, free of charge, a copy of the plans summary annual report each year
Where must assets be placed for a qualified plan
- in a qualified trust or a custodial account
How many alternatives must a plan provide participants with
- 3
What criteria must different investment alternatives meet in a qualified plan
- Be diversified
- Have materially different risk and return characteristics and
- each alternative, when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participants or beneficiary’s portfolio
Can an employer use a promissory note to make contributions to a qualified plan that would qualify for a tax deduction
- No this is a prohibited transaction and is not a payment that qualifies for an income tax deduction
When can an employer apply contributions to the previous year
- contributions are made by the due date of the tax return of the previous year plus extensions
- plan was established by the due date of the tax return plus extensions
- plan treats the contributions as though it had received them on the last day of the previous year
- company specifies in writing to the plan administrator or trustee that the contributions apply to the previous year or the company takes a deduction for the amount of the contribution on the tax return for the previous year
When can a self employed individual make contributions on behalf of themselves to a qualified plan
- if they have positive net earnings from self employment in the trade or business for which the plan was established
Are catch up contributions subject to annual contribution limits
No
How can a plan correct an excess addition
- allocate the excess annual additions to other plan participants
- hold excess annual additions in a separate account and allocate in future years
- make corrective distributions
What is the most the can be contributed to a defined contribution plan
- 25% of the compensation paid or accrued during the year to eligible employees participating in the plan
What is the maximum an employer can deduct if they maintain a defined benefit plan and a defined contribution plan
- maximum deductible amount is the greater of 25% of the aggregate covered compensation of employees or the required minimum funding standard of the defined benefit plan
What is Keogh plan
- is simply a qualified plan for a self employed person
How is earned income defined by the IRS for self employed individuals
- as net earnings from self employment less one half of self employment tax less the deduction from contributions to the qualified plan on behalf of the self employed person
How do you calculate the self employed contribution rate
Contribution Rate/ (1 + Contribution Rate)
How do you calculate self employment
Net self employment income x 92.35%
= Net Earnings Subject to Self employment tax
x 12.4% up to $142,800 + 2.9% on all income
= Self Employment Tax
How do you calculate the self employed individuals contribution to a Keogh plan
Net self employment income
- 1/2 Self employment tax
= Adjusted Net Self Employment earnings
x Self employed contribution rate
= Self Employed individuals plan contribution
What happens if a employer contributes more to a qualified plan that can be deducted in the current year
- can be carried over and deducted in future years
- carryover amount may be subject to a 10% excise tax
Does the 10% excise tax apply to any contribution made for a self employed individual to meet the minimum funding requirements in a defined benefit plan
No even if that contribution is more than the earned income from the trade or business for which the plan is set up the difference is not subject to this excise tax
Who is considered a disqualified person for a qualified person
1 - Fiduciary of the plan
2 - person providing services to the plan
3 - an employer, any of whose employees are covered by the plan
4 - an employee organization any of whose members are covered by the plan
5 - Any direct or indirect owner of 50% or more of any of the following (stock, capital, profit interest, beneficial interest of a trust or unincorporated enterprise)
- a member of the family of any individual in 1, 2, 3, or 5
What is a prohibited transaction involving a disqualified plan
- transfer of plan income or assets to, use of them by, or for the benefit of a disqualified person
- Self dealing by a fiduciary
- receipt of consideration by a fiduciary for his own account, when working with a party dealing with the plan
- selling, exchanging, leasing, buying as well as lending or borrowing between a disqualified person and the plan
What is the initial penalty for a prohibited transaction
- 15% excise tax on the amount involved for each year in the taxable period
- no penalty if corrected within 14 days of the date the disqualified person discovers or should have discovered the transaction
- if not corrected within the taxable period an additional tax of 100% of the amount involved is imposed
What is the key obligation that ERISA imposes on a retirement plan administrator
- Fiduciary duty
Who is the administrator of a plan required to provide a benefit statement to under the pension protection act of 2006 for a defined contribution plan
- A participant or beneficiary who has the right to direct the investment of assets at least quarterly
- any other participant or other beneficiary who has their own account under the plan, at least annually
- to other beneficiaries upon written request but limited to one request during any 12 month period
How often does a plan statement need to be provided to a participant or beneficiary in a defined contribution plan that has the right to direct the investment of assets
- at least quarterly
How often does a plan statement need to provided to any participant or beneficiary who has their own account under the plan
- at least annually
What is the department of labor in charge of
- enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers benefit rights as regulated by ERISA
What does the Pension Benefit Guaranty Corporation do
- acts to guarantee pension benefits
What does the PBGC not cover
- defined contribution plans
- defined benefit pension plans of professional services corporation with 25 or fewer participants
Are qualified plans required to be permeant
- no they are allowed to terminate
What happens when a qualified plan terminates
- all of the participants in the plan become fully vested in their benefits as of the date of termination
What are the requirements for a defined benefit plan to terminate
ERISA requires that a defined benefit plan terminate under a:
- Standard Termination
- Distress Termination
- Involuntary Termination
What is a standard termination for a defined benefit plan
- is voluntary and may occur when the employer has sufficient assets to pay all benefits (liabilities) at the time of final distribution
What is a distress termination for a defined benefit plan
- is voluntary and occurs when the employer is in financial difficulty and is unable to continue with the plan financially
What is a involuntary termination for a defined benefit plan
- a involuntary termination may be initiated by the PBGC for a plan that is unable to pay benefits from the plan in order to limit the amount of exposure to the PBGC
How can a defined contribution plan be freezed
- simply means that the employer will no longer make any contributions
How can a defined benefit plan be freezed
- participants will no longer accrue additional benefits but the plan sponsor must maintain the previously accrued benefit
