Chapter 5 Flashcards
What are the 7 types of profit sharing plans?
Profit sharing plans, stock bonus plans, Employee stock ownership plans, 401k plans, thrift plans., age based profit sharing plans, new comparability plans.
What are some common characteristics of profit sharing plans?
All profit sharing plans are defined contribution plans and are established and maintained by the employer. All profit sharing plans provide for employee participation in profits. All profit sharing plans utilize a definite predetermined formula for allocating the contributions to the plans. All profit sharing plans are either noncontributory or contributory.
T/F Contributions made to profit sharing plans must be mad by the due date of the company’s income tax return including any extensions.
True
T/F Contributions are required and must be substantial and recurring.
False, contributions are discretionary and must be substantial and recurring.
T/F Contributions are limited to 25 percent of total employer covered compensation.
True
T/F Contributions are limited to the lessor of compensation or 50,00 for 2016
False, 53,000
What is standard allocation?
Equal percentage for all employees.
What is social security integration?
Provides higher allocations to employees who earnings are greater than the social security wage base. Profit sharing programs only use excess method.
What is age based profit sharing plans?
Use a combination of age and compensation to allocate the plan contribution. Increases contributions to plans for those who are older.
What is the initial step in calculating the contribution under an age-based profit sharing plan?
Determine the present value of a future dollar.
What is a new comparability plan and what are the main benefits of such a plan?
Contribution depends upon employee classification and designed to skew benefits towards owner classification.
What tests must a new comparability plan pass?
NHCE allocation rate is at least 1/3 of HCE with the highest allocation rate. Each NHCE receives an allocation of at least 5 percent.
What is the most common CODA arrangment
A 401k
What does CODA stand for?
Cash or deferred arangement
What is the most common type of retirement plan?
401k which are predominantly funded by employee contributions.
T/F Coda plan can attach to a profit sharing plan or a stock bonus plan
True
What is the deferral limit for 2016 for 401k plans?
18,000 in 2016 or 24,000 for 2106 for those age 50 and over.
A 401k may be established by:
Corporations, partnerships, LLCs, sole proprietorships, or tax-exempt entitles.
T/F 401(k)s cannot be established by governmental entititles
True
What are the qualification requirements for a 401k plan?
Eligibility- 21 and 1 year rule. Vesting 100 percent employee deferral contributions. Employer matching contributions 2 to 6 graduated or 3 year cliff.
T/F Deferral contributions are subject to payroll taxes
True.
T/F After tax contributions are not available for 401ks
Falso, after tax contributions are available through a thrift plan and roth 401k. Post tax are allowed after 2005 if plan adopts a roth deferral provision.
Employer matching contributions may include:
matching contributions, prifit sharing contributions, contibutions to meet ADP/ACP requirements, forfeitures.
T/F Coda’s are not permitted to use SS integration.
True.
T/F Employee deferral contributions are not subject to taxation
False, while contributions are not subject to income tax, they are subject to payroll taxes. Employer contributions are not subject to payroll taxes.
Non discriminatory testing
Benefits must be provided to a certain percentage of rank and file employees.
Negative elections rules.
The employee is deemed to have elected a specific employee deferral unless the employee elects out.
ADP Test Discrimination.
Limits the employee elective deferrals for the HC based on the elected deferrals of NHC.
What is the ADP test designed to do?
Adp Test designed to ensure that others besides the HC are utilizing the 401k plan. This limits the HC from deferring too much more than NHC
Who is a highly compensated employee?
More than 5 percent ownership or compensation greater than 120,000.
If the ADP for NHC employees is between 0 and 2 percent, then _____________________________.
the permissible adp for HC employees is 2 times ADP for NHC employees.
If the adp for NHC employees is between 2 to 8 percent, then________________________________________.
the permissible adp for HC employees is 2% plus ADP for compensated employees.
If the ADP for NHC employees is 8 percent and over, then ____________________________________________.
the permissible adp for HC employees is 1.25 times ADP for NHC employees.
What happens if a plan fails to meet the ADP test?
There are four options which decreases the ADP of HC employees or increases the ADP of NHC employees.
Corrective Distrbibution Returns
This decreases the ADP of HC employees by returning part of the HC employee’s deferral amounts.
Re-characterization.
Change from pre tax to after tax contributions. This decreases the ADP of HC employees.
Qualified Non-elective contributions
Make contributions to NHC for the purposes of passing the Adp test. Increases ADP of NHC employees. Made to all eligible NHC employees and are 100 percent vested.
Qualified Matching Contributions
Make an additional matching contribution only to NHC employees that elect to defer. This increases the ADP of NHC employees. The contribution is 100 percent invested. It is made only to employees who elect to defer in the current year.
ACP is like ADP, but is determined utilizing ___________________________.
Employee after-tax contributions, and employer matching contributions.
T/F ACP uses the same scale as ADP.
True.
T/F ACP does not use the same corrective procedures as ADP
False, it uses the same procedures as ADP.
Safe harbor 401k test
Plans are not required to pass ADP or ACP test.
What are the requirements for safe harbor for 401k plans
A 3 percent nonelective contribution to all eligible employees. A matching contribution of 100 percent up to 3 percent and 50 percent form 30-5 percent.
T/F Employer contributions are 100 percent veested at all times for a safe harbor 401k plan
True.
T/F Plans that contain a “qualified automatic enrollment: feature are eligible for new nondiscrimination safe harbor and are treated as meeting the ADP and ACP test and are not subject to top heavy rules.
True
A qualified enrollment feature must meet__________.
Automatic deferral, matching or nonelective contributions, and notice to employees.
T/F Unless an employee elects otherwise, the employee is treated as making an election to make elective deferrals equal to a stated percentage of compension not in excess of 10 percent and at least equal to: Year 1-3 percent, year 2- 4 percent, year 3- 5 percent, year 4 and after- 56 percent
True
The automatic enrollment feature satisfies the contribution requirement if the employer either:
1) meets the matching contribution requirement or 2) makes a nonelective contribution to a defined contribution plan of at least 3 percent of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the automatic enrollment feature.
A plan generally satisfies the matching contribution requirement if: (list the 1st requirement)
1) The employer makes a matching contribution on behalf of each nonhighly compensated employee that is equal to 100 percent of the employee’s elective deferrals up to 1 percent of compensation and 50 percent of employee’s elective deferrals up to 1 percent of compensation and 50 percent of the employee’s elective deferrals between 1 and 6 percent of compansation
A plan generally satisfies the matching contribution requirement if: (list the second requirement)
the rate of match with respect to any elective deferrals for highly compensated employees is not greater than the rate of match for nonhighly compensated employees.
T/F Each employee eligible to participate in the qualified automatic enrollment feature must receive notice of the feature informing the employee of such rights and obligations and is written in a manner calculated to be understood by the average employ.
True
What must the notice include in a QACA?
1) The employee’s right under the arrangement to to elect not to have elective contributions made on the employee’s behalf or to elect to have contributions made in a different amount and (2) how contributions made under the automatic enrollment arrangement will be invested in the absence of any investment election by the employee.
What are the distribution types for CODA plans?
Normal distribution, hardship distributions
Hardship distributions include:
Distributions for immediate and extreme financial need: medical expenses, purchase of principal residence, tuition and fees, preventing eviction from a principal residence. No other sources of funds are available. May be subject to a 10 percent early withdrawal penalty in addition to being taxed at ordinary income tax rates.
T/F U.S. Government thrift plans are qualified plans
False, they are not qualified plans, but the limits are the same and most features are the same as a 401k plan.
