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CFP 515 > Chapter 1: Qualified Plan Requirements and Regulatory Considerations > Flashcards

Chapter 1: Qualified Plan Requirements and Regulatory Considerations Flashcards

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1
Q

What does the IRS do for QRPs?

1.1

A

Supervises

Monitors

Governs the tax aspects

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2
Q

What is ERISA?

1.1

A
  • A law that governs non-tax aspects
  • Also monitors group health and welfare plans
  • Their goal is to protect the interest of the retirement participants
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3
Q

What is the Department of Labor?

A
  • Enforces ERISA reporting and disclosure
  • Oversees prohibited transaction rules
  • Regulates plan fiduciaries
  • Issues communications to explain ERISA
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4
Q

What is the PBGC?

1.1

A
  • Insures plans
  • Like the FDIC for DB retirement plans and cash balance plans
  • Backed by the fed
  • Doesn’t cover PSC
  • It can terminate a plan if the min funding amounts are not met or if it can’t pay benefits when they are due.
  • Doesn’t cover defined contribution plans
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5
Q

Types of plans include:

1.1

A
  • Qualified Plans
  • Tax Advantage Plans
  • Nonqualified Plans
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6
Q

What is a Qualified Plan? 1.1

A
  • Meets the requirements of 401(a)
  • Meets ERISA requirements
  • Employer can deduct money that goes in
  • Employee pays taxes when they pull money out
  • Grows tax deferred
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7
Q

What is a tax-advantaged plan? 1.1

A

Similar to qualified

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8
Q

What is a non-qualified plan? 1.1

A

Doesn’t have to meet the qualified requirements

NO deduction for the employer until the worker is taxed

Can discriminate

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9
Q

What are the attributes of a qualified versus a nonqualified plan?

1.2

A

Qualified plans:

  • CAN’T discriminate
  • Subject to ERISA
  • Immediate employer deduction
  • Employee deferral of tax and earnings
  • Funding is required by due date of tax return
  • Distributions are taxed as ordinary income
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10
Q

What are the main ERISA and IRC requirements that apply to qualified plans?

A
  1. Eligibility
  2. Coverage
  3. Limitations on contributions and benefits
  4. Vesting requirements
  5. Top-heavy plans
  6. Integration with Social Security rules
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11
Q

What are eligibility requirements?

1.2

A
  • 21
  • 1 year of service (at least 1000 hours of work)
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12
Q

What are coverage requirements?

1.3

A

They look at either

  1. HCE versus key employees
  2. 5% owners versus 1% owners
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13
Q

What makes you a highly compensated employee?

1.3

A

If you meet any of these requirements:

You’re in the top 20% of compensated people at the company.

or you are a 5% owner

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14
Q

What are the three coverage tests?

1.3

A
  1. Percentage test
  2. Ratio test
  3. Average benefits percentage test

You only have to meet one of these to be a qualified plan

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15
Q

What is the coverage rule for 401k plans?

1.3

A

If you are elibiligle to contribute, you are considered covered even if you aren’t actually contributing.

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16
Q

What is the percentage test?

1.3

A

At least 70% of the non-HCEs are covered.

17
Q

What is the ratio test?

1.3

A

The percent of non-HCEs that are covered is at least 70% of the HCEs that are covered.

18
Q

What is the average benefits test?

1.3

A

The average benefits for non-HCEs is at least 70% of the average benefits for HCEs.

19
Q

What is the 50/40 test?

1.3

A

This is only for defined benefit plans

50 people or 40% of your people are covered.

20
Q

What are the limitations on DB retirement plans?

1.3

A
  • It can’t cover more than $290k
  • You can’t promise yourself more than 100% of your highest 3 consectuvie years of salary—limited at $230k
    *
21
Q

What is the contribution limit for DC plans?

1.3

A

$58k total

Doesn’t include catchup contributions

22
Q

How do employer contributions vest? What are the different schedules?

1.3

A

DB Plans

  • 5-year cliff or
  • 3-7 year graded

DC Plans

  • 3-year cliff
  • 2-6 year graded

automatic vesting on plan termination

23
Q

What are key employees?

1.3

A

Any of the following

  • Officer making more than $185k
  • Greater than 5% owner
  • 1% owner with comp more than $150k
24
Q

What happens if a plan is top-heavy?

1.3

A

It’s top-heavy when more than 60% of the benefits are going to key employees.

In DB plans:

  • The vesting schedule changes from 3-7 to 2-6
  • must provide a min defined benefit accrual of 2% times the number of years of service, up to 20% for all non key employees

In DC plans:

  • Doesn’t make a difference for vesting
  • The non-key employees must get at least a 3% contribution
25
Q

What are the requirements for integrating a retirement plan with social security?

1.3

A
  • Social security stops at the taxable wage base ($137k in 2020)
  • So the social security

Excess benefit percentage = the base percent + permitted disparity

26
Q

What are social security integration limits?

1.3

A

DB plans:

  • Max permitted disparity between benefit percentage is 25% of 1% x years of service up to 35 years

DC plans:

  • Excess percentage cannot exceed the lesser of
    • two times the base percentage
    • base percentage plus 5.7%
27
Q

How do you establish a qualified plan?

1.4

A

Get an Advanced Determination Letter from the IRS

or

adopt a master or prototype plan (these are standardized plans)

28
Q

What are reporting and disclosure requriemtns?

1.4

A
  • Summary plan description (spd) within 120 days
  • Annual report (Form 5500 series) to the IRS
  • Summary annual report (SAR) to participants
  • DC Plans must provide quarterly statements if people are directing their own investments
  • Summary of material modification (SMM)- explains changes in the plan, issued as needed.
29
Q

When can investment adviosrs recommend their own funds?

A
  • Advisor fees must be neutral
  • Unbiased computer model

(IRAs can only use neutral fee option)

Advisors are held to the prudent standard

30
Q

What are prohibited transaction rules?

1.4

A
  • Certain transactions between qualified plan and party in interest or fiduciary
  • Participant loans have to meet the IRC code

15% penalty until the plan is corrected

Fiduciaries are personal liable for these penalties

Prohibited transactions include:

  • sale or exchange of property between a plan and a dsqualified person
  • the sale of undeveloped land
  • Loans between the plan and any party in interest
  • transfer of plan assets or use of plan assets for the benfit of a party in interest
  • the plans acquisition of employer securities or real proeoperty in excell of legal limits
  • self-dealing
31
Q

What is the max deductible contributions that an employer can make?

A

25% of aggregate covered payroll

32
Q

What is a defined benefit plan vs a defined contribution?

A

DB: The employer is promising a defined benefit like annuity payments to the employer. They aren’t necessarily putting money away..

DC: the employer actually contributes to the employees’ plan (401k)

33
Q
A
34
Q

Who issues Prohibited Transaction Exemptions? (ptes)

A

Department of labor

35
Q

What is the 50/40 test?

A

Mandates that all defined benefit pension plans must benefit the lesser of

50 employees or

40% of all eligible employees

36
Q

How is a percentage owner defined when thinking about HCE employees?

A

Either 5% owner or 1% owner

For IRS purposes, if an individual owns 2% of the company, the taxpayer is considered a 1% owner and if an individual owns 7% or 90% of a company, the taxpayer is considered a 5% owner.

37
Q

How rapidly does a non top heavy qualifed defined benefit plan need to vest?

A

Five-year 100% or cliff vesting. In this schedule, no vesting is required before five years of employee service, with 100% vesting then required at the end of five years of service. „

Three-to seven-year graduated or graded vesting. Using this schedule, the plan must provide vesting that is at least as fast as those listed in the following table

38
Q

How rapidly does a defined contribution plan need to vest?

A
  • Three year cliff vesting schedule
  • two-six year graded vesting schedule

If a defined benefit pension is top heavy, it also uses this schedule

39
Q

Explain contributory vs Noncontributory plans

A

Contributory: Employees can contribute

Noncontributory: employer pays all

Most pension and profit sharing plans are noncontributory. Common exception is 401k plan

CFP 515 (8 decks)

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