Chapter 1: Qualified Plan Requirements and Regulatory Considerations Flashcards
What does the IRS do for QRPs?
1.1
Supervises
Monitors
Governs the tax aspects
What is ERISA?
1.1
- 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
What is the Department of Labor?
- Enforces ERISA reporting and disclosure
- Oversees prohibited transaction rules
- Regulates plan fiduciaries
- Issues communications to explain ERISA
What is the PBGC?
1.1
- 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
Types of plans include:
1.1
- Qualified Plans
- Tax Advantage Plans
- Nonqualified Plans
What is a Qualified Plan? 1.1
- 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
What is a tax-advantaged plan? 1.1
Similar to qualified
What is a non-qualified plan? 1.1
Doesn’t have to meet the qualified requirements
NO deduction for the employer until the worker is taxed
Can discriminate
What are the attributes of a qualified versus a nonqualified plan?
1.2
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
What are the main ERISA and IRC requirements that apply to qualified plans?
- Eligibility
- Coverage
- Limitations on contributions and benefits
- Vesting requirements
- Top-heavy plans
- Integration with Social Security rules
What are eligibility requirements?
1.2
- 21
- 1 year of service (at least 1000 hours of work)
What are coverage requirements?
1.3
They look at either
- HCE versus key employees
- 5% owners versus 1% owners
What makes you a highly compensated employee?
1.3
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
What are the three coverage tests?
1.3
- Percentage test
- Ratio test
- Average benefits percentage test
You only have to meet one of these to be a qualified plan
What is the coverage rule for 401k plans?
1.3
If you are elibiligle to contribute, you are considered covered even if you aren’t actually contributing.
What is the percentage test?
1.3
At least 70% of the non-HCEs are covered.
What is the ratio test?
1.3
The percent of non-HCEs that are covered is at least 70% of the HCEs that are covered.
What is the average benefits test?
1.3
The average benefits for non-HCEs is at least 70% of the average benefits for HCEs.
What is the 50/40 test?
1.3
This is only for defined benefit plans
50 people or 40% of your people are covered.
What are the limitations on DB retirement plans?
1.3
- 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
*
What is the contribution limit for DC plans?
1.3
$58k total
Doesn’t include catchup contributions
How do employer contributions vest? What are the different schedules?
1.3
DB Plans
- 5-year cliff or
- 3-7 year graded
DC Plans
- 3-year cliff
- 2-6 year graded
automatic vesting on plan termination
What are key employees?
1.3
Any of the following
- Officer making more than $185k
- Greater than 5% owner
- 1% owner with comp more than $150k
What happens if a plan is top-heavy?
1.3
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
What are the requirements for integrating a retirement plan with social security?
1.3
- Social security stops at the taxable wage base ($137k in 2020)
- So the social security
Excess benefit percentage = the base percent + permitted disparity
What are social security integration limits?
1.3
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%
How do you establish a qualified plan?
1.4
Get an Advanced Determination Letter from the IRS
or
adopt a master or prototype plan (these are standardized plans)
What are reporting and disclosure requriemtns?
1.4
- 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.
When can investment adviosrs recommend their own funds?
- Advisor fees must be neutral
- Unbiased computer model
(IRAs can only use neutral fee option)
Advisors are held to the prudent standard
What are prohibited transaction rules?
1.4
- 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
What is the max deductible contributions that an employer can make?
25% of aggregate covered payroll
What is a defined benefit plan vs a defined contribution?
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)
Who issues Prohibited Transaction Exemptions? (ptes)
Department of labor
What is the 50/40 test?
Mandates that all defined benefit pension plans must benefit the lesser of
50 employees or
40% of all eligible employees
How is a percentage owner defined when thinking about HCE employees?
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.
How rapidly does a non top heavy qualifed defined benefit plan need to vest?
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
How rapidly does a defined contribution plan need to vest?
- Three year cliff vesting schedule
- two-six year graded vesting schedule
If a defined benefit pension is top heavy, it also uses this schedule
Explain contributory vs Noncontributory plans
Contributory: Employees can contribute
Noncontributory: employer pays all
Most pension and profit sharing plans are noncontributory. Common exception is 401k plan
