CH 5 - Profit-Sharing Plans, 401(K) Plans, Stock Bonus Plans, & ESOPs Flashcards
What FOUR plans are considered DC profit-sharing plans?
- profit-sharing
- stock bonus
- ESOP
- 401(K)
Why would an employer choose a profit-sharing plan? (3)
- Contribution flexibility
- In-service withdrawal flexibility
- Allocation formula is flexible (Allocate more to key employee’s life insurance)
What profit-sharing plan borrow from banks to purchase stock?
ESOP
What are the FIVE characteristics of an ESOP and Stock Bonus plan?
- Investments are primarily in employer stock
- Creates a market for employer stock
- Distributions issued in stock
- Put option
- Voting requirements
ESOP plans allow diversification of investments in a participant’s account if…
age 55+10 years of service.
Which of the following is commonly used in small companies or S-corporations?
A. stock bonus
B. ESOP
ESOP
What are the features available in a 401(k) plan? (5)
- salary deferrals
- matching contributions
- profit-sharing contributions
- after-tax employee contributions
- roth elections
What are the special deferral limits and catch-up rules that apply to 401(k) plans?
$18,000 with a $6K catch-up that applies to every single plan (eg - aggregate)
All employee salary deferrals are ____% vested.
100%
When it comes to salary deferrals, what are the restrictions concerning safe-harbor hardship withdrawals from a 401(k) plan? (6)
- In-service financial hardship
- 59 1⁄2
- Any safe-harbor hardship event (Med. expenses, purchase/repair/foreclose of home, college education, or burial expenses)
What how the does the ADP 1.25 Test differ from the ADP 2.00 Test?
1.25 - Average ADP of the HCEs for the current year cannot exceed 125 percent of the average ADP for the non-highly compensated for the prior year.
2.00 - The average of the ADP for the HCEs for the current year cannot exceed more than 200 percent of the average ADP for the non-highly compensated for the prior year. In addition, the difference between the averages for each group cannot exceed 2 percentage points.
How can a plan satisfy the ADP test? (3)
- safe-harbor contributions
- exclude employees unlikely to contribute
- correct a failed year before the end of the year by returning money to HC employees or add more money to the non-highly compensates employees
What is the maximum contribution limit per employee, per year under a DC plan?
100% of salary or $54K.
This does not include catch-up contributions for workers over age 50.
What is the maximum deductible contribution limit for ALL covered participants under a DC plan?
25% of the aggregate compensation of all covered participants.
Most 401(k) plans use matching contributions to encourage employee participation. What are the matching contribution options? (3)
- fixed amount (50 cents for each dollar up to 6% deferred)
- graded amount (50% on first 4% deferred and 25% on next 4% deferred)
- discretionary amount
How is the enrollment process handled for a 401K plan?
auto enrollment
What type of 401K plans will be treated as salary deferrals and subject to ADP testing?
Roth 401K plans
Most 401(k) plans let participants direct the investment of at least the…
salary deferral amounts.
401K plans allow each participant to take ________ and ________.
loans
and
hardship withdrawals
What is a Safe-Harbor contribution?
Where the employer makes a at least a 100% matching contribution on the first 3% of deferred salary and 50% of the next 2% of deferred salary, OR a nonelective contribution of 3% of compensation for all eligible NHCEs.
Safe-harbor “reasonably available” requirement will suspend contributions for
6 months
