Assignment 7 - Foundation of 401K plans (CODAs)

Question 1

CODA

Answer 1

Cash or Deferred Arrangment

Question 2

ADP

Answer 2

Actual Deferral Percentage

–includes salary deferrals

Question 3

ACP

Answer 3

Actual Contrib. Percentage

–includes matching and after-tax contribs

Question 4

Catch-up

Answer 4

• Extra contributions permitted for EE’s age 50 and over

- $5,500

Question 5

ADP Test

Answer 5

• 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

Question 6

401K safe harbor

Answer 6

• 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%

Question 7

When an EE exceeds the deferral limit ($16,500)

Answer 7

Excess Deferrals

Question 8

Results in failing the ADP or ACP Tests

Answer 8

Excess Contributions

Question 9

CODA
Adv. for ER
Adv. for EE

Answer 9

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.

Question 10

CODA
Disadv. for ER
Disadv. for EE

Answer 10

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

Question 11

PPA of 2006 and effects on 401K plans

Answer 11

• 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.

Question 12

EE authorizes ER to contrib to CODA on pretax basis

- either by salary reduction or through election to defer

Answer 12

Elective Contribs

Question 13

ER contribs made on behalf of elig. EE’s regardless of whether they have made elective deferrals

Answer 13

Nonelective Contribs

Question 14

money an EE is deemed to have rec’d and taken as income

Answer 14

A/T EE Contribs

Question 15

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

Answer 15

Matching Contribs

Question 16

nonelective contribs. to which:

1. contrib. must be fully vested at all times
2. may not be distrib’d to the EE on an in-service basis for any reason b4 EE reaches age 59 1/2

Answer 16

Qualified nonelective contribs. (QNECs)

Question 17

matching contribs. that:

1. contrib. must be fully vested at all times
2. may not be distrib’d to the EE on an in-service basis for any reason b4 EE reaches age 59 1/2

Answer 17

Qualified Matching Contribs (QMACs)

Question 18

• 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

Answer 18

safe harbor contribs.

Question 19

EE contribs. where EE elects to have all or portion of elective deferral treated as an after-tax “Roth contrib.”

Answer 19

Designated Roth contribs.

Question 20

Vesting standards (nonforfeitability requirements)
(CODA)

Answer 20

• 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

Question 21

In-service w/drawal limitations

Answer 21

• no w/drawals unless:
  1. death
  2. disability
  3. separation from service
  4. term. of plan

Question 22

how are elective contribs. treated for SS taxation?

Answer 22

• 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.