Chapter 8 - Installation, Administration, and Termination of Qualified Plans Flashcards
Define Actual Contribution Percentage Test (ACP)
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.
Define Actual Deferral Percentage Test (ADP)
A nondiscrimination test that limits employee elective deferrals for the HC based on the elective deferrals of the NHC.
Define Cash or Deferred Arrangement (CODA)
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.
Define Custodial Accounts
Accounts generally maintained by a bank or other financial institutions for the benefit of participants.
Define Department of Labor
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.
Define Determination Letter
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.
Define Discretionary Contributions
Allows an employer to decide each year whether to make a matching, or nonelective contribution and then inform the plan participants.
Define Distress Termination
Termination that occurs when the employer is in financially difficulty and is unable to continue with defined benefit plan.
Define Employee Census
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.
Define Employee Retirement Income and Security Act (ERISA)
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.
Define ERISA Attorney
An attorney who specializes in ERISA law.
Define Fiduciary
An individual that has a special relationship of trust, confidence, and responsibility in certain financial obligations.
Define Forfeitures
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).
Define Interested Parties
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.
Define Involuntary Termination
Termination initiated by the PBGC for a defined benefit plan that is unable to pay benefits from the plan.
Define Keogh Plan
A qualified plan for a self-employment individual.
Define Mandatory Funding Requirement
An amount or % that must be contributed to a qualified pension plan by the employer each plan year.
Define Master Plan
Provides a single trust or custodial account that is jointly used by all adopting employers.
Define Pension Benefit Guarantee Corporation (PBGC)
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.
Define Plan Freeze
Employer will no longer make any contributions to the plan, but does not want to fully terminate the plan.
Define Prohibited Transactions
Transactions between the plan and a disqualified person that are prohibited by law.
Define Prototype Plan
A prepackaged plan that allows the sponsor to use a check the box approach to plan choices.
Define Qualified Trust
A trust established or organized in the US that is maintained by the employer for the exclusive benefit of employees.
Define Standard Termination
Termination in which the employer has sufficient assets to pay all benefits (liabilities) at the time of final distribution.
Define Summary of Marital Modifications
Document that provides in plain language the modifications made to a qualified plan.
Define Summary Plan Description
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.
Define Third Party Administration
An organization unrelated to the plan sponsor who is paid to administer the plan sponsor’s qualified or other retirement plan.
Define Volunteer Submitter Plan
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.
When choosing a qualified plan to use, what business objectives might be considered that would influence your decision? 6
- 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
What are the steps involved in choosing the right type of qualified plan?
- Establish the objectives for the plan
- Prepare an employee census to identify the beneficiaries of variou plans and the financial impact of alternative plans on the employer sponsor
- Identify the types of plans that can meet both the qualitative and quantitative objectives.
- Assess each plan’s financial characteristics
- Select plan
What would make up a plan’s financial characteristics? 5
- Contribution costs
- Costs of administration
- Flexibility of contribution
- Burden of investment risks
- Necessity of mandatory funding
When doing an employee census to decide what plan to put in place, what information is being collected? 5
- Name
- Age
- Compensation
- # of years of employment
- Any ownership interest
What are common plan administration costs? 8
- 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)
What functions do a TPA or bundled provider take care of?
- Trustee Duties
- Recordkeeping
- Administration
- Investment Management
- Reporting and Disclosure
If a company wanted to begin a qualified plan, what requirements must they be willing to comply with? 7
- Nondiscrimination and broad coverage
- Eligibility Rules
- Reporting Rules
- Testing Rules
- Disclosure Rules
- Coverage Rules
- Vesting Rules
What are the four types of plans that can be adopted? (Not looking for 401k, etc)
- Master Plan
- Prototype Plan
- Volume Submission Plan
- Individually Designed Plan
What are seven sources of information about a company’s qualified plan?
- 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
What criteria must the investment alternatives given the plan participants meet?
- 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.
How can you correct excess annual additions?
- 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
What type of entities can have a Keogh plan?
Sole proprietors who file a Schedule C
Partners of a partnership
Members of an LLC
What must a fiduciary of a qualified plan do?
- 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.
What must a fiduciary of a qualified plan not do?
- 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.
Who enforces the rules put in place with regards to plan administration?
Department of Labor
What reasons might make a plan sponsor amend or terminate the plan? 4
- To maximize benefits for key employees
- Law changes
- Employer is unable to support
- Benefits were not sufficient
