Chapter 8 - Installation, Administration, and Termination of Qualified Plans

Question 1

Define Actual Contribution Percentage Test (ACP)

Answer 1

A nondiscrimination test that limits the sum of employee after-tax contributions for the highly compensated employees based on the sum of employee after-tax contributions for the non-highly compensated employees. The test also includes employer matching contributions.

Question 2

Define Actual Deferral Percentage Test (ADP)

Answer 2

A nondiscrimination test that limits employee elective deferrals for the HC based on the elective deferrals of the NHC.

Question 3

Define Cash or Deferred Arrangement (CODA)

Answer 3

Permits an employee to defer a portion of their salary on a pretax basis to a qualified plan or receive the salary as current taxable income.

Question 4

Define Custodial Accounts

Answer 4

Accounts generally maintained by a bank or other financial institutions for the benefit of participants.

Question 5

Define Department of Labor

Answer 5

Governmental department charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and worker’s benefit rights as regulated by ERISA.

Question 6

Define Determination Letter

Answer 6

A request filed with the IRS requesting a determination on a particular topic. In the case of a retirement plan, they are used when a plan is adopted, amended, or terminated to assure the plan sponsor that the qualified plan complies with applicable provisions.

Question 7

Define Discretionary Contributions

Answer 7

Allows an employer to decide each year whether to make a matching, or nonelective contribution and then inform the plan participants.

Question 8

Define Distress Termination

Answer 8

Termination that occurs when the employer is in financially difficulty and is unable to continue with defined benefit plan.

Question 9

Define Employee Census

Answer 9

A matrix of information that is used in plan selection and identifies each employee, their age, compensation, number of years of employment, and any ownership interest in the plan sponsor.

Question 10

Define Employee Retirement Income and Security Act (ERISA)

Answer 10

Legislation enacted by Congress in 1974 as a result of various abuses by plan sponsors to provide protection for an employee’s retirement assets, both from creditors and from plan sponsors.

Question 11

Define ERISA Attorney

Answer 11

An attorney who specializes in ERISA law.

Question 12

Define Fiduciary

Answer 12

An individual that has a special relationship of trust, confidence, and responsibility in certain financial obligations.

Question 13

Define Forfeitures

Answer 13

The % or amount of participant’s accrued benefit that was not vested to the employee at the employee’s termination from the plan sponsor. The forfeited amount stays in the plan and may be allocated to the other plan participants (defined contribution plan) or reduce future plan costs (defined contribution or defined benefit plan).

Question 14

Define Interested Parties

Answer 14

Present employees who are eligible to participate in the plan and present employees who are not eligible for the plan but whose principal place of employment is the same as the principal place of employment of any employee who is eligible to participate.

Question 15

Define Involuntary Termination

Answer 15

Termination initiated by the PBGC for a defined benefit plan that is unable to pay benefits from the plan.

Question 16

Define Keogh Plan

Answer 16

A qualified plan for a self-employment individual.

Question 17

Define Mandatory Funding Requirement

Answer 17

An amount or % that must be contributed to a qualified pension plan by the employer each plan year.

Question 18

Define Master Plan

Answer 18

Provides a single trust or custodial account that is jointly used by all adopting employers.

Question 19

Define Pension Benefit Guarantee Corporation (PBGC)

Answer 19

Established in 1974 when President Gerald Ford signed ERISA into law. The PBGC guarantees qualified pension benefits. It is a federal corporation that acts as an insurance provider to maintain the benefits promised to employees by their defined pension plans.

Question 20

Define Plan Freeze

Answer 20

Employer will no longer make any contributions to the plan, but does not want to fully terminate the plan.

Question 21

Define Prohibited Transactions

Answer 21

Transactions between the plan and a disqualified person that are prohibited by law.

Question 22

Define Prototype Plan

Answer 22

A prepackaged plan that allows the sponsor to use a check the box approach to plan choices.

Question 23

Define Qualified Trust

Answer 23

A trust established or organized in the US that is maintained by the employer for the exclusive benefit of employees.

Question 24

Define Standard Termination

Answer 24

Termination in which the employer has sufficient assets to pay all benefits (liabilities) at the time of final distribution.

Question 25

Define Summary of Marital Modifications

Answer 25

Document that provides in plain language the modifications made to a qualified plan.

Question 26

Define Summary Plan Description

Answer 26

Document that explains in plain language the details of a retirement plan and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits.

Question 27

Define Third Party Administration

Answer 27

An organization unrelated to the plan sponsor who is paid to administer the plan sponsor's qualified or other retirement plan.

Question 28

Define Volunteer Submitter Plan

Answer 28

A plan that is designed by a professional, such as an attorney, CPA or third party administrator, which contains language that has been pre-approved by the IRS. This type of plan allows for more customization that a standard prototype plan, but is generally much less costly that an individualized plan.

Question 29

When choosing a qualified plan to use, what business objectives might be considered that would influence your decision? 6

Answer 29

- To benefit owners of a small business - To benefit all employees - To benefit select employees - To attract, retain, or reward employees - To encourage early retirement - T provide a tax-advantaged plan

Question 30

What are the steps involved in choosing the right type of qualified plan?

Answer 30

1. Establish the objectives for the plan 2. Prepare an employee census to identify the beneficiaries of variou plans and the financial impact of alternative plans on the employer sponsor 3. Identify the types of plans that can meet both the qualitative and quantitative objectives. 4. Assess each plan's financial characteristics 5. Select plan

Question 31

What would make up a plan's financial characteristics? 5

Answer 31

- Contribution costs - Costs of administration - Flexibility of contribution - Burden of investment risks - Necessity of mandatory funding

Question 32

When doing an employee census to decide what plan to put in place, what information is being collected? 5

Answer 32

- Name - Age - Compensation - # of years of employment - Any ownership interest

Question 33

What are common plan administration costs? 8

Answer 33

- Consultation and plan set-up/implementation expenses - Funding - Recording - Administration - Nondiscrimination Test - Reporting/Disclosure to Participants (including statements and summary annual reports) - IRS/Department of Labor Reporting (Form 5500) - Fiduciary Duties (such as fulfilling ERISA §404(c) requirements with education programs and enrollment meetings)

Question 34

What functions do a TPA or bundled provider take care of?

Answer 34

- Trustee Duties - Recordkeeping - Administration - Investment Management - Reporting and Disclosure

Question 35

If a company wanted to begin a qualified plan, what requirements must they be willing to comply with? 7

Answer 35

- Nondiscrimination and broad coverage - Eligibility Rules - Reporting Rules - Testing Rules - Disclosure Rules - Coverage Rules - Vesting Rules

Question 36

What are the four types of plans that can be adopted? (Not looking for 401k, etc)

Answer 36

- Master Plan - Prototype Plan - Volume Submission Plan - Individually Designed Plan

Question 37

What are seven sources of information about a company's qualified plan?

Answer 37

- Summary Plan Description - Summary of Material Modification - Summary Annual Report - Plan Documents - Periodic Pension Benefit Statement - §404(c) Plan Disclosures - Notice of Blackout Period for Individual Account Plans

Question 38

What criteria must the investment alternatives given the plan participants meet?

Answer 38

- Be diversified - Have material different risk and return characteristics, which in the aggregate enable the participant or beneficiary to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate (efficient frontier) for the participant or beneficiary, and - Each alternative, when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio.

Question 39

How can you correct excess annual additions?

Answer 39

- Allocate the excess annual addition to other plan participants. - Hold excess annual additions in a separate account and allocate in future years - Make corrective distributions

Question 40

What type of entities can have a Keogh plan?

Answer 40

Sole proprietors who file a Schedule C Partners of a partnership Members of an LLC

Question 41

What must a fiduciary of a qualified plan do?

Answer 41

- Must exercise care, skill, and diligence of a prudent person acting solely in the interest of plan participants and their beneficiaries. - Has an obligation to diversify the plan's assets to reduce the risk of loss - Act in accordance with the plan's provisions and must refrain from acts forbidden under the law.

Question 42

What must a fiduciary of a qualified plan not do?

Answer 42

- Not be paid for their services if they are already receiving full-time pay from an employer or union whose employees or members are participants. - They cannot act in any transaction involving the plan on behalf of a party whose interests are adverse to those of the plan, its participants, or beneficiaries. - May not receive any consideration for their own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan. - They may not cause a plan to engage in certain transactions with parties in interest. - May not permit more than 10% of a pension plan's assets to be invested in employer securities.

Question 43

Who enforces the rules put in place with regards to plan administration?

Answer 43

Department of Labor

Question 44

What reasons might make a plan sponsor amend or terminate the plan? 4

Answer 44

- To maximize benefits for key employees - Law changes - Employer is unable to support - Benefits were not sufficient