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
