Assignment 7 - Foundation of 401K plans (CODAs) Flashcards
CODA
Cash or Deferred Arrangment
ADP
Actual Deferral Percentage
–includes salary deferrals
ACP
Actual Contrib. Percentage
–includes matching and after-tax contribs
Catch-up
- Extra contributions permitted for EE’s age 50 and over
- $5,500
ADP Test
- ADP of HCE can’t be greater than 125% of ADP of NHCE
OR - the lesser of 2% plus rate of NHCE no more than 2X the rate of the NHCE
401K safe harbor
- avoids the need to pass ADP or ACP test
- ER either matches at rate of 100% of first 3% plus 50% on next 2-6%
OR - nonelective discretionary contib. of 3% increasing 1% up to 6%
When an EE exceeds the deferral limit ($16,500)
Excess Deferrals
Results in failing the ADP or ACP Tests
Excess Contributions
CODA
Adv. for ER
Adv. for EE
ER - attractions/retention of EE's - improves EE morale - achieves better sense of corp. ID. - serve specific corporate objectives EE - tax shelter = when distrib., tax paid might be considerably less than it would have been - flexibility of determining whether to take amts in cash or defer them under the plan.
CODA
Disadv. for ER
Disadv. for EE
ER - complex and costly admin - dealing w/ EE relations - greater communications effort needed - satisfying discrim. testing EE - elective contribs. are subject to w/drawal limits. and early distrib. tax
PPA of 2006 and effects on 401K plans
- ER contribs. for DC plans must vest at least as rapidly as either a 3-yr cliff or 6-yr graded vesting sched.
- publicly traded comps. that hold publicly traded ER securities allow partic. to diversify acct balances held in ER securities.
- partic. who have completed 3 yrs of service must be permitted to diversify invs. at least qtrly.
- ERISA preempts any state wage/hr law that prohibits or restricts auto. enroll. features in DC plans
- optional nondiscrim. safe harbor plan designs for auto-enrollments
- modified harship rules to include partic’s spouse or dependent.
EE authorizes ER to contrib to CODA on pretax basis
- either by salary reduction or through election to defer
Elective Contribs
ER contribs made on behalf of elig. EE’s regardless of whether they have made elective deferrals
Nonelective Contribs
money an EE is deemed to have rec’d and taken as income
A/T EE Contribs
ER contribs made when an EE authorizes an elective deferral or makes an A/T EE contrib.
- 3% deferral, increasing 1% up to 6%; ER contrib. of match of 3% or match of 100% on first 1% and 50% on 2-6% deferral; vesting w/in 2 years
Matching Contribs
nonelective contribs. to which:
- contrib. must be fully vested at all times
- may not be distrib’d to the EE on an in-service basis for any reason b4 EE reaches age 59 1/2
Qualified nonelective contribs. (QNECs)
matching contribs. that:
- contrib. must be fully vested at all times
- may not be distrib’d to the EE on an in-service basis for any reason b4 EE reaches age 59 1/2
Qualified Matching Contribs (QMACs)
- ER Contribs made to allow plan to meet safe harbor requirements in order to avoid ADP testing
- must be fully vested
- subject to distrib. restrictions
safe harbor contribs.
EE contribs. where EE elects to have all or portion of elective deferral treated as an after-tax “Roth contrib.”
Designated Roth contribs.
Vesting standards (nonforfeitability requirements) (CODA)
- value of all elective and any A/T EE contribs. must be fully vested at all times
- QNECs, QMACs, and safe harbor contribs. must be fully vested at all times.
- auto-enroll safe harbor contribs. need not vest for 2 years
In-service w/drawal limitations
- no w/drawals unless:
1. death
2. disability
3. separation from service
4. term. of plan
how are elective contribs. treated for SS taxation?
- considered as wages for SS and fed’l unempl. ins.
- FICA taxes are paid on such amts under taxable wage base
- taken into acct when calculating an EE’s SS benef.
