CFP Retirement Planning Flashcards
What are the two criteria of the 50/40 test?
- The plan must benefit at least 50% of NHCEs.
- Alternatively, the plan must benefit the lesser of 40% of all employees or at least two employees (or one if only one employee).
What is the purpose of the 50/40 test for qualified plans?
To ensure the benefits of qualified retirement plans do not disproportionately favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).
Which type of plans does the 50/40 test typically apply to?
Defined benefit plans.
How is a Highly Compensated Employee (HCE) defined?
An employee who owns more than 5% of the business anytime during the current or previous year, or received compensation above a specified amount in the last year and, if elected, is in the top 20% of employees by compensation.
How often is the 50/40 test conducted?
Annually.
What are the consequences if a plan fails the 50/40 test?
The plan may lose its qualified status, leading to potentially adverse tax consequences for the employer and employees.
What is the ratio percentage test for a qualified retirement plan?
The ratio percentage test requires that the percentage of non-highly compensated employees (NHCEs) benefiting from the plan must be at least 70% of the percentage of highly compensated employees (HCEs) benefiting from the plan.
What is a Highly Compensated Employee (HCE)?
More than a 5% owner or received compensation in excess of $155,000 (2024) (indexed).
What is a Key Employee?
Greater than a 5% owner or an officer of the employer having annual compensation greater than $220,000 (2024) or a greater than 1% owner whose salary exceeds $150,000.
For employer-sponsored retirement plan eligibility purposes, a year of service is defined as which of the following?
A year of service means a 12-month period during which the employee has at least 1,000 hours of service.
What is the “Top Paid” Group?
The group of employees in the top 20%, ranked on the basis of compensation paid for the year.
Employer Vesting Schedules for Defined Contribution Plans
Three-Year Cliff Vesting:
* 100% vested after three years of service.
* No vesting required before three years.
Two- to Six-Year Graded Vesting:
* 2 years: 20% vested
* 3 years: 40% vested
* 4 years: 60% vested
* 5 years: 80% vested
* 6 years: 100% vested
Employer Vesting Schedules for Defined Benefit Plans
Five-Year Cliff Vesting:
* 100% vested after five years of service.
* No vesting required before five years.
Three- to Seven-Year Graded Vesting:
* 3 years: 20% vested
* 4 years: 40% vested
* 5 years: 60% vested
* 6 years: 80% vested
* 7 years: 100% vested
What is the historical context for Employer Vesting Schedules for Defined Benefit Plans & Defined Contribution Plans?
- Pre-2006: Both Defined Contribution and Defined Benefit Plans could use these schedules.
- Post-2007: Only Defined Benefit Plans can use these schedules; Defined Contribution Plans must use shorter vesting schedules.
For the purpose of determining the top-paid group, the following employees may be excluded:
- Employees with less than six months of service,
- Employees who normally work less than 17½ hours per week,
- Employees who normally work for not more than six months in any year,
- Employees under the age of 21,
- Except as provided by regulations, employees covered by a collective bargaining agreement, and
- Nonresident aliens with no U.S.-earned income.
As an alternative to determing who the Highly Compensated Employees are, the employer may elect to simply identify the (insert answer here) of eligible employees as highly compensated.
The top-paid group of employees for a year is the group of employees in the top 20%, ranked on the basis of compensation paid for the year.
What are the three coverage tests for qualified plans? Provide a brief definition for each.
- The Safe Harbor Test: A plan covers at least 70% of all eligible non-highly compensated employees.
- The Ratio Percentage Test: The percentage of non-highly compensated employees covered is at least 70% of that of highly compensated employees.
- The Average Benefits Test: The average benefit for non-highly compensated employees is at least 70% of that for highly compensated employees.
