Assignment 6 - Prof.-Sharing Plans and Money Purch. Plans Flashcards
- contrib. by ER is not req’d, but must be “substantial & recurring
- generally 3-5% at least once every 5 years
Substantial/recurring contribution (profit sharing plans)
- generally pro-rata based on pay
- uniform percentage of pay with same vesting schedule and years of service defin. applying to all partic.
- can be point system or age-based
- stated in plan doc.
Contrib. allocation (profit sharing plans)
permitted
- must be available to all EE’s
- bear reasonable interest rate
- adequately secured
- made only by plan
- repmt in 5 yrs
- pmts made at least qtrly]
- treated as taxable distribs.
- max of $50,000 OR 50% of vested account
Loans
(3) basic profit-sharing plans
- Current (cash)
- Deferred
- Combination
- type of profit sharing plan
- profits are paid directly to EE in cash, check, or stock as soon as profits are determined
Current (cash) profit sharing approach
- type of profit sharing plan
- profits are credited to EE accounts to be paid at retirement or other stated dates or circumstances
- can be tax-exempted by IRC Section 401
Deferred profit sharing approach
- type of profit sharing plan
- part of the profit is paid out currently in cash and the other part is deferred
- can be tax-exempted by IRC Section 401
Combination profit sharing approach
typical coverage requirements for profit-sharing plans
- exclusive benefit of EE’s and beneficiaries
- must not result in discrim. in favor of HCEs
- can impose min. age requirement (IRC - 21)
can specify a min. service requirement (IRC - 1 or 2 years)
adv. for contribs. made on discretionary basis
profit sharing
- provides contrib. flexibility (can be adj’d to reflect firm’s financial position and capital needs)
- assures that contribs. will not exceed the max amt allowed as a ded. exp. for fed’l income tax purposes.
adv. for using a definite predetermined formula
profit sharing
raises EE morale and feelings of security
- EE’s can readily calculate anticipated plan contribs. based on measured operation results
- *IRC doesn’t require a def. predet. form.; necessary that a profit sharing plan include a def. allocation form. to be qualified
Forfeitures (profit sharing plans)
- occur when EE’s term. w/ less than full vesting
- plan sponsors may use EE forfeitures either to reduce ER contribs. or may reallocate the forfeitures among remaining plan partics.(norm)
Can profit-sharing plan involving cash or deferred arrangment (CODA) be integrated w/ SS?
- any portion of a profit-sharing plan that consists of a CODA may NOT be integrated w/ SS
Max. ded. ER contrib. limitations (profit sharing plans)
- 25% of compens. paid or accrued during the ER’s taxable year (2001 - EGTRRA)
- if greater = carryover provisions can apply called “contrib. carryover” which can be ded. by ER if the next year isn’t over 25%.
- anything over 25% is in excess and subject to 10% penalty tax.
Vesting Scheds. and term’d profit sharing plans
- all assets in the fund vest immediately for the plan partics.
- each partic. is entitled to bal. of his or her acct.
taxation of money purch. plans
- subj. to min. funding and joint-and-survivor requirements (DB plan)
- indiv. accts mainted for EE’s (DC plan)
- subj. to annual addtion limits of Sect. 415 IRC (DC plan)
- not subj. to plan term. provisions of ERISA (DC plan)
