Chapter 3

Question 1

What is the difference between a pension plan and a profit sharing plan?

Answer 1

Pension plans pay a pension at retirement while profit sharing is a defferal of compensation. In service withdrawals are available for profit sharing plans and pension plans are mandatory fudning. Profit sharing plans can invest 1000 in employer securities while pension plans can only invest 10 percent. There is a qualified joint and survivor annuity for pension plans.

Question 2

What is the difference between a defined benefit and a defined contribution plan?

Answer 2

In defined contribution the annual limit is 100 percent of covered compensation while defined benefit is the greater of the sum of the plan’s funding target, target normal cost, and a cushion amount, over the value of plan assets of the minimum required contribution for the plan year. In defined benefit the employer assumes the risk while defined contribution the employee assumes the risk. Forfeitures reduce plan costs in defined benefit. PBGC guaranty applies to defined benefit.. IN defined benefit the funds are commingled while in defined contribution they are separate. Credit can be given for prior service in defined benefit.

Question 3

What are the tax advantage of qualified plans?

Answer 3

Income tax is deferred. Payroll taxes are avoided on employer contributions. No avoidance however is available for employee elective deferrals. There is also income tax deferral of earnings and income on qualified plan assets.

Question 4

What protections can qualified plans have?

Answer 4

There is Employee Retirement Income Security Act creditor protection. Anti alienation which prohibits any action that may cause the plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings. Protection from employers.

Question 5

What special taxation options are available for lump sum distribution?

Answer 5

Pre 1974 Capital Gain Treatment. 10 Year Forward Averaging. Net unrealized Appreciation

Question 6

T/F There must be a plan document in order for there to be a qualified plan

Answer 6

True

Question 7

Plan Document details…..

Answer 7

The terms of the plan

Question 8

T/F Plan documents must be consistent with IRC qualification requirements to be a qualified plan

Answer 8

True

Question 9

T/F The document must be in writing and signed by the end of the plan year for which it is to be effective.

Answer 9

True

Question 10

What are the eligibility requirements to qualified plans?

Answer 10

Typically the requirements are 21 yrs and 1 year of service (defined as at least 1,000 hours and 1 year)

Question 11

T/F There is a special election to require two years of service, bu the consequence of such an election is immediate- 100 vesting requirement.

Answer 11

True.

Question 12

T/F The plan must have four entrance dates for each quarter.

Answer 12

False the plan must have two entrance dates per year because you cannot make an eligible participant wait longer than 6 months to enter.

Question 13

T/F The plan must include employees that typically failed minimum age and length of service requirements

Answer 13

False, the plan must exclude.

Question 14

T/F Coverage must exclude employees covered under a collective bargaining agreement

Answer 14

True

Question 15

T/F Plans must exclude nonresident alien employees that do not perform services in the U.S.

Answer 15

True

Question 16

The safe harbor test

Answer 16

Greater than or equal to 70 percent of NHC

Question 17

The Ratio Test

Answer 17

Percentage of NHC over HC

Question 18

The average benefits test

Answer 18

AB of NHC/ AB of HC

Question 19

T/F All defined benefit plans must meet one of the coverage tests and additionally pass the 50/40 Test

Answer 19

True

Question 20

The 50/40 Test

Answer 20

The plan must cover the lesser of 50 non-excludable employees or 40 percent of non excludable employees

Question 21

Who is a highly compensated employee if they are owners?

Answer 21

Either an owner above 5 percent or compensation in excess of 120,000.

Question 22

Who is a highly compensated employee if they are non-owner employees?

Answer 22

Compensation in excess of 120,000

Question 23

A 5 percent owner is defined as:

Answer 23

Individual owned shares plus attribution of shares owned by spouse, children, grandchildren, parents.

Question 24

Defined Benefit plan is _____ heavy if the _____ ____ of the total accrued benefits of key employees in the defined benefit plan exceeds ____ percent of the present value of the total accrued benefits of the defined benefit plan for all employees.

Answer 24

top, present value, 60.

Question 25

A defined contribution plan is top heavy when the _____ of the account balances of key employees in the plan exceeds ____ percent of the aggregate of the accounts of all employees.

Answer 25

aggregate, 60.

Question 26

A key employee is defined as:

Answer 26

A greater than five percent owner, or one percent owner with compensation in excess of 150,000, or an officer with compensation in excess of 170,000.

Question 27

T/F If a defined contribution plan is top heavy, there are minimum funding requirements.

Answer 27

True.

Question 28

What are the funding requirements for top heavy contribution plans?

Answer 28

Employer must provide non-key employees with a contribution equal to at least 3 percent of employees compensation.

Question 29

T/F If a defined benefit plan is top heavy, there are no minimum funding and vesting requirements

Answer 29

False, there are minimum funding and vesting requirements.

Question 30

What are the funding and vesting requirements for non key employees in top heavy defined contribution plans?

Answer 30

Employer must provide non-key employees with a benefit equal to 2 percent per years of service (limit 20) times employees annual compensation. Vesting must use 2-6 graduated or 3 year cliff.

Question 31

What is the covered compensation limit for benefits and contributions?

Answer 31

265,000 for 2016. This is the minimum amount of compensation that can be considered when determining contribution amounts to a DC plan.

Question 32

What are the plan limitation on benefits and contributions for defined benefit plans?

Answer 32

The lesser of 210k for 2016 or 100 percent of the average of the employee three highest consecutive years of salary. This is the maximum benefit that can be received during retirement.

Question 33

What are the limits for defined contribution plans?

Answer 33

The lesser of 100 percent of an employee compensation or 53 percent of 2016.

Question 34

The annual additions limit include the summation of:

Answer 34

Employer contributions, and employee contributions, and any forfeitures allocated to the participant’s account.

Question 35

What is the limitation for multiple employer plans?

Answer 35

If employer contributions to a DC plan are less than 6 percent of compensation of participants in those plans: the n the combined limit does not apply to any employer contributions to defined contribution plans. In such a case, the combined limit of the greater applies only to contributions to defined benefit plans.

Question 36

What happens when an employer contributes more than 6 percent of compensation in multiple employer plans?

Answer 36

Then the amount of employer contributions to defined contribution plans to which the combined limit applies is equal to the amount of employer contributions for the plan year less 6 percent of compensation of participation in those plans.