Course 1: Plan Types Flashcards
A defined Contribution plan maintains an ____ ______ ______ for each participant.
Individual account balance
A ______ Contribution plan is also known as an individual ______ plan
Defined, Account
A defined contribution plan participant’s benefit is based solely on…
the value of the account balance
The defined contribution plan account balances reflect…
contributions, forfeitures and investment earnings allocated to the account during the employee’s period of participation
A participant’s account balance in a defined contribution plan represents…
His or her share of the value of the trust’s assets
When a participant takes a distribution of his or her account from a defined contribution plan, the amounts paid will be based on the value of the account balance…
at that time (or as of the most recent valuation date specified in the plan.)
The defined contribution plan account balance that will be available to provide benefits at retirement (or any distribution event) is…
not guaranteed, because fluctuations in the value of assets directly affect the account balance.
Because the size of a defined contribution plan participant’s benefit at retirement depends in part on the amount of investment returns experienced by the participant’s account,…
the participant is considered to bear the risk of investment loses
If a defined contribution plan’s investments do not earn as much as one would hope, the participant’s benefit will be ______.
Less
If the defined contribution plan earns more than anticipated, the participant’s benefit will be ______ than expected.
Better
Because of the link between investment returns and the ultimate benefit enjoyed by the participant, many defined contribution plans…
permit participants to direct the investments for their own accounts.
The law defines a defined benefit plan to be any plan other than a…
defined contribution plan
This means a defined benefit plan does not maintain ______ _______ to reflect the accrued benefits of the plan ______.
Account Balances, Participants
For defined benefit plans, the amount available to provide benefits at retirement is determined by…
a formula stated in the plan
A defined benefit plan must provide ______ ______ ______.
definitely determinable benefits
A defined benefit plan must define the ______ ______ and how benefits are accrued or earned ______ _____ _______.
Benefit Formula, under that formula.
The employer that sponsors a defined benefit plan is required to…
fund the plan sufficiently to provide benefits
Defined Benefit plan funding will come from ______ ______ and the ______ ______ that the contributions earn in the trust.
Employer Contributions, Investment returns
The risk of investment loss in a defined benefit plan is borne by the ______ ______.
Plan Sponsor
If the defined benefit plan’s investments earn better than expected, these earning will cover a…
greater share of the cost of the plan and the employer will contribute less.
If the defined benefit plans investments lose money or perform worse than expected, the employer…
will contribute more to make up the difference.
IRC 401(a)(4): provided that a plan is a qualified plan only if the ______ or the ______ provided under the plan do not discriminate in favor of _______. (Nondiscrimination testing)
contributions,benefits, HCEs
IRC 401(a)(8): A trust forming part of a ______ ______ plan shall not constitute a qualified trust under this section unless the plan provides that ______ must not be applied to increase the benefits any employee would otherwise receive under the plan. (Treatment of forfeitures)
Defined benefit plan, forfeitures
IRC 401(a)(9): All stock bonus, pension, and ______-______ plans qualified under section 401(a) and ______ contracts described in section 403(b) are subject to required minimum distribution rules. (Minimum Distributions)
Profit-Sharing, annuity
IRC 401(a)(11): A trust, which is part of a plan providing payment of benefits in any form of a ______ ______, shall not constitute a qualified trust unless plan provisions are met in section 417. (Provision and calculation of qualified joint and survivor annuity)
life annuity
IRC 415: A trust which is a part of a pension, profit-sharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if in the case of a defined benefit plan, the plan provides for the ______ ___ ______ with respect to a participant which exceed the limitation of subsection (b) (Annual Limitation)
payment of benefits
IRC 415: A trust which is a part of a pension, profit-sharing, or stock bonus plan shall not constitute a qualified trust under section 401(a) if in the case of a defined contribution plan, ______ and other additions under the plan with respect to any participant for any taxable year exceed the limitation of subsection (c). (Annual Limitation)
contributions
IRC 401(a)(26): A plan satisfies this paragraph (a) for a plan year only if the plan benefits at least the lesser of-
1) __ employees of the employer
2) __ percent of the employees of the employer
(Minimum Participation Test (applies only to defined benefit plans))
50, 40
IRC 411(a)(6): For purposes of paragraph (4), in the case of any participant in a defined ______ plan, or an insured defined ______ plan which satisfies the requirements of subsection (b)(1)(F), who has 5 consecutive 1-year breaks in service, years of service after such 5-year period shall not be required to be taken into account for purposes of determining the nonforfeitable percentage of his accrued benefit derived from employer contributions which accrued before such 5-year period.
(Five Year break-in-service rule under vesting requirements.)
Contribution, Benefit
IRC 416: A trust shall not constitute a qualified trust under section 401(a) for any plan year if the plan of which it is a part is a top-heavy plan for such plan year unless such plan meets:
- _______ requirements of subsection (b), and
2 the ______ ______ requirements of subsection (c)
(the manner of calculating top heavy minimum benefits)
Vesting, minimum benefit
IRC 404(a): Deduction for _______ of an employer to an employees’ trust or annuity plan and _______ under a deferred-payment plan
(different deduction rules based on defined benefit or defined contribution plan.)
Contributions, Compensation
Under treasury regulation relating to plan qualification, a ______ ______ is intended to provide for the livelihood of the employees or their beneficiaries after the retirement of such employees through the payment of benefits determined without regard to ______ ______
Pension plan, company profits
A pension plan is one that is: established and maintained by an employer primarily to provide ______ for the payment of _______ ________ _______ to his or her employees over a period of years, usually for life, after retirement.
systematically, definitely determinable benefits
Retirement benefits in a pension plan are generally measured by, and based on, such factors as ______ __ ______ and _______ received by the employees.
Years of Service, Compensation
The first major requirement is for a pension plan to have ______ ______ ______ -there must be either a formula for determining the participant’s benefit at retirement or a definite formula for determining a company’s annual contribution to the plan.
definitely determinable benefits
Defined benefit plans, money ______ plans and target _______ plans are always ______ plans
Purchase, benefit, Pension
Although the ultimate retirement benefit is not definite in a money ______ plan or a target ______ plans, these plans are deemed to satisfy the definitely determinable benefits rule because the employer’s annual contribution is predetermined by a formula outline by the plan.
Purchase, Benefit
Plans that have a predetermined formula allow for an employer’s contribution to be determinable and a benefit can be projected to ______ ______ ______ (NRA) based on the assumption that the contribution formula will continue to apply in future years,
Normal Retirement Age
The actual _______ ______ of the trust’s assets will affect the value of the account balance and, in turn, the ultimate benefit payable from the plan.
Investment experience
The second major requirement for a pension plan is that it may not permit __-______ ______ of benefits except after the participant has attained age 59 ½ or NRA. Therefore, pension plans may not provide for withdrawals to participants on the occurrence of a _______ or upon a stated event or the simple passage of time.
In-Service Withdrawal, hardships
______ ______ do not have to satisfy the definitely determinable benefits requirement.
Nonpension plans
There are two types of nonpension plans:
- profit-sharing plans
- Stock bonus plans
_______ ______ plans are nonpension plans because they are classified as either profit-sharing plans or stock bonus plans.
Section 401(k)
Nonpension plans must provide for a ______ _______ ______ which outlines the method by which the employer’s contributions is allocated among the plan participant’s accounts once the contribution is made to the plan.
definite allocation formula
A ______-______ ______ is a defined contribution plan under which the employer’s contribution each year may be determined at the employer’s discretion.
Profit-sharing plan
No contribution is mandatory, although contributions over the years must be ______ and ______.
recurring and substantial
A ______ ______ ______ is a defined contribution plan under which the benefits are distributable in employer stock (essentially the same as a profit-sharing plan, except that it is designated as a ______ _______ _______ and becomes subjet to certain IRC requirements that are applicable to only this plan type.
Stock Bonus Plan, Stock Bonus Plan
______ ______ ______ maintain an individual account balance for each participant. A participant’s benefit is based ______ on the value of the account balance.
Defined Contribution Plans, Soely
The account balance of a defined contribution plan will reflect ______, ______, and ______ ______ allocated to the account
contributions, forfeitures, and investment earnings
Because the size of a participant’s benefit at retirement depends in part on the amount of ______ ______ experienced by the participant’s account, the ______ is considered to bear the risk of investment.
Investment returns, participant
Beause of the direct link between investment returns and the ______ ______ enjoyed by the participant, many defined contribution plans permit participants to direct the ______ of their own accounts.
Ultimate benefit, investments
Money Purchase Plans are less popular because they:
-Have _______ employer contributions
-Have more restrictive ______ rules than 401(k) plans
-Cannot permit ______ ______
mandatory, distribution, elective deferrals
Money Purchase Plans are required to have:
-A ______ contribution requirement for determining the company’s annual contribution to the plan
definite
Money Purchase Plans are required to have:
-May permit distribution only upon retirement, death, disability, termination of employment, and in-service distributions made to a participant who have reached age ____ (for plan years prior to 2020, age provision was ___)
59 1/2, 62
Money Purchase Plans are required to have:
-The _______ formula may differ from the _______ formula but the total for each must be the same
Allocation, Contribution
Money Purchase Plans are required to have:
- Must comply with the ______ ______ ______, meaning the plan sponsor is required to make certain contributions and is subject to excise taxes if it does not do so
Minimum Funding Requirements
Money Purchase Plans are required to have:
- Required to comply with the qualified joint and survivor annuity rules, meaning distributions must be paid as an ______ unless the participant and spouse consent to an alternative form of payment.
Annuity
Money Purchase are a benefit to:
-______ who want the obligation to make a contribution so this can be communicated to employees
-______ and ______ ______ of employees that negotiate benefits want the certainty of a contribution for their members.
Employers, Union and other classes
_____-______ plans are defined as contribution plans under which the employer’s contribution each year may be determined at the ______ discretion.
Profit-Sharing, Employers
Some plans do elect to include a specific ______ ______ in their plan document.
employer contribution
Many profit-sharing plans include a ______ feature
401(k)
Profit share plan requirements:
-______ ______ are allowed, meaning the employer determines the amount to contribute each _____. The plan may have a fixed formula but it is not required.
Discretionary formulas, year
Profit Share plan requirements:
-If the formula is based on the ______ _______ or contingent on the employer having profits, the plan document must define how those profits are _______.
employer’s profit, Calculated
Profit share plan requirements:
-the law required that contributions be ______ and ______. Failure to do so can cause ______ _______.
substantial and recurring, accelerated vesting
Profit Sharing plan requirements:
-The allocation formula must be defined in the ______ ______
plan document
Profit Sharing requirements:
-______ ______ are flexible and in-service distributions can be allowed for: financial hardship, a stated age, a disability, and contributions that have been in the plan for at least _ years, or after __ months of plan participation.
Distributions rules, 2, 60
Profit sharing plan requirements:
-Required to comply with the _______ ______ and survivor annuity rules only if it _____ to satisfy the exemptions,
qualified joint, fails
Profit sharing plan benefits flexibility in contributions and in-service distributions, and ability to add a _____ ______ ______.
401(k) deferral feature
A ______ ______ _______ is similar to a profit-sharing plan except benefits are distributable to ______ ______.
Stock Bonus Plan, Employer stock
A stock bonus plan has the same ______ and ______ formula options as a profit-sharing plan.
contribution and allocation
Most stock bonus plans provide for a _______ ______ formula and may adopt any of the allocation formulas available to ______-_______ and money purchase plans.
discretionary contribution, profit-sharing
A ______ _______ _______ the employer is permitted to make its contribution in the form of it’s ___ _____.
Stock bonus plan, own stock
If the employer makes cash contributions to a stock bonus plan, the fiduciaries usually invest those contributions ______ or ______ in employer stock.
exclusively or primarily
A ______ ______ is a profit-sharing plan or stock bonus plan that allows for employee elective deferrals
401(k) plan
A 401(k) plan allows employees to defer some of their _______ to a retirement plan.
compensation
The ___ _____ ______ that allows elective deferrals is section 401(k).
Tax code section
Any employer can adopt a 401(k) plan except ______ and _______ ______ employers.
state and local government
A 401(k) plan allows elective deferrals and may include a combination of ______ contributions, ______ contributions, and _____-___ employee contributions
matching, nonelective, after-tax
Elective deferrals are amounts of an ______ salary that are contributed to the plan by the ______ made at the election of the employees, in lieu of paying such employees cash ______.
employee’s, employer,compensation
A ______ deferral is not included in the employee’s current taxable income but rather is taxable, along with the investment earnings, upon ______.
Pre-Tax, distribution
______ deferrals are currently taxable but the earnings may be tax free upon distribution if certain ______ are met.
Roth, conditions
______ Contributions are employer contributions that are based on an employee’s elective deferrals or _____-___ employee contributions
Matching, After-Tax
______ contributions are employer contributions made to all employees ______ of and not tied to any elective deferrals that an employee makes.
Nonelective, regardless
_____-___ employee contributions are employee contributions that are included in the employee’s current taxable income but, unlike ____ deferrals, the earnings are taxed when distributed.
After-Tax, Roth
___-_____ rules require and ______ ______ to a plan where most of the benefits got to the owners and other ___ employees
Top-Heavy, Employer Contribution, key
In a 401(k) plan with only elective deferrals, if the _____ defer significantly more than their employee as a whole, the the employer may be required to put in a ___-_____ minimum contribution for the employees.
Owners, Top-Heavy
______ rules measure how much the employees of a company benefit from the plan compared to the _____ and other ____ ______ ______.
Nondiscrimination,owners and highly paid employees
If the employees choose not to defer or they defer at a ___ ____, it can limit the amount that owners or ____ are able to defer
low rate, HCEs
Employee _____ ______ plan (____) may be a stock bonus plan, or a combination of a stock bonus plan and money purchase plan.
Stock ownership, ESOP
An ______ plan or a portion of a plan may be designated as an ____
entire, ESOP
If only a portion of a plan is designated as an ESOP, the other portion of the plan will be characterized as one of the other types of ______ ______ _____.
defined contribution plans
An ESOP must be designed to invest primarily in ______ ______.
employer securities
The ______ and ______ formulas under an ESOP normally operate under the same rules as _____-______ plans.
contribution and allocation, profit-sharing
______ ______ plans are not defined contribution plans, meaning they do not maintain ______ ______ _______.
Defined Benefit, individual account balances
Defined benefit plans guarantees a ______ to participants.
benefit
In a defined benefit plan, it is the ______ responsibility to ensure that the plan has enough _____ to provide all participants their retirement benefits.
Employer’s, money
Defined benefit plans benefit in that the ______ can be very large, and significantly more than the ______ allowed for defined contribution plans.
contributions, maximum
Many employers sponsor these plans for ___ ______ and to accumulate ______ _____ for owners and key employees than they would be able to under defined contribution plans
tax purposes, larger benefits
Defined benefit contributions are required even if the ______ has a bad ____.
company, year
A ______ _______ ______ Plan (SEP) is essentially an employer provided _______ ______ ______ (IRA)
Simplified Employee Pension Plan, Individual Retirement Account
In SEP IRAs a _____ is not established, as for qualified plans, but instead the ______ contributes directly for the participants.
trust,employer
Unlike a profit -sharing plan, employees of all ______ employers who meet the ______ _______ must be covered by the SEP.
related,eligibility conditions
A SEP may have a ______ age requirement up to age __
Minimum, 21
A SEP may require the employee to have performed service for the employer in a last __ of the last __ years.
3 of the last 5 years
A SEP has no ______ number of ____ required
minimum, hours
SEP plans are ____ for employers who want to have the ______ in contributions of a profit-sharing plan but don’t want as many ______ and ______ requirements.
good, flexibility,reporting and disclosure
SEP Plans allow only ______ contributions and are _____ vested.
employer, fully
All employees (except those that make less than $650.00 for 2021) must participate once they have had service in __ out of the __ years in a SEP plan.
3, 5
The SEP may not impose any ______ on _______. An employee could withdraw all contribution at ___ _____ in time.
restrictions, withdrawals, any point.
______ _______ Match Plan (SIMPLE) IRA eligible employees may make ______ ______ (Pre-tax or Roth) to the plan.
Savings Incentive, Elective Deferrals
Unlike 401(k) plans, the SIMPLE IRA ______ are deposited to an employee’s ___.
deferrals, IRA
An employer may maintain a SIMPLE IRA plan for a ______ year only if it has ___ or fewer employees earning at east _____ of compensation for the _____ calendar year.
Calendar, 100, $,5000.00, prior
All employees who were employed in a SIMPLE IRA at any time during the _____ calendar year are taken into account regardless of whether they are ______ from the SIMPLE IRA.
Prior, Excludable
An employer cannot sponsor both a SIMPLE IRA and a ______ plan in the same year unless:
1. the qualified plan covers only _____ employees and the SIMPLE IRA plan ______ ______ employees, the qualified plan may be maintained.
2. ______ relief because of an acquisition,______, or merger of companies.
qualified, union, excludes union, transitional, disposition
A SIMPLE 401(k) is a ______ plan that is subject to SIMPLE IRA ______ rules.
qualified, contribution
SIMPLE 401(k) contributions will be made to the plan’s _____ and not to each participant’s ___.
Trust, IRA
SIMPLE IRA Rules that apply to SIMPLE _____ plans:
-Which ______ are eligible to maintain the plan (eg., less than 100 employees)
-The _____ dollar limitation on elective deferrals and catch-up contributions
-The employer contribution _____ requirements.
-the ______ tests for contributions are deemed satisfied
-The ______ limit for purposes of calculating the ______ contribution.
-All contributions are _____ vested
___-_____ rules do not apply
-the plan year must be the ______ year.
401(k), employers, lower, formula, nondiscrimination, compensation, nonelective, fully, top-heavy, calendar
SIMPLE IRA V SIMPLE 401(k):
The 401(k) plan _______ rules apply to the SIMPLE 401(k) plan. The maximum age and service requirements are age __ and __ year of service.
Eligibility, 21 and 1 year of service
SIMPLE IRA V SIMPLE 401(k):
Employees may be ______ from the simple 401(k) plan if the ______ rules are satisfied
Excluded, Coverage
SIMPLE IRA V SIMPLE 401(k):
Unlike a SIMPLE IRA, the ___ on the includible compensation applies to ______ contributions, not just the ______ contributions.
cap, matching, nonelective
The ______ limitations that apply to the 401(k) plans apply to the _______ 401(k) plan, but no the SIMPLE ____.
distribution, SIMPLE, IRA
The ______ in the 10% additional income tax on early distributions, for distributions prior to age _____, does not apply to SIMPLE 401(k) plans, although pre-age ____ distributions are still subject to the 10% penalty
Increase, 59 1/2, 59 1/2
The IRA ______ distribution rules apply to a SIMPLE IRA; the _____ plan rules apply to the SIMPLE 401(k) plans.
minimum, qualified
The ______ ______ rules apply to the SIMPLE 401(k) plan but do not apply to a SIMPLE IRA.
Spousal Consent
_____ to participants are not permitted in SIMPLE IRAs, but they are _______ in a SIMPLE 401(k) plan
Loans, permitted
A SIMPLE 401(k) plan is subjet to ____ _____ filing requirements
Form 5500
A 403(b) plan is a deferred compensation plan that is offered to employees of certain ______ _______, certain _______ and related organizations and ___-______ employers under 501(c)(3)
Educational organizations, certain churches, tax-exempt employers
_______ under a 403(b) plan can only be made to:
-an ______ ______ provided through an insurance company
-a ______ ______ invested in mutual funds, or
-a ______ ______ account set up for church employees
Annuity contract, Custodial Account, Retirement Income
Because 403(b) plans originally could only be invested in ______ ______, the plans are sometimes referred to as “___=______ ______” plans.
annuity contracts,tax-sheltered annuity
403(b) Plans are subject to a ______ ______ rule, meaning elective deferrals must be made available to _______ in the organization.
Universal Availability, everyone
Beccause of the ______ ______ rule, 403(b) plans elective deferrals are not subject to ___ testing or ______ testing
Univeral Availability, ADP, Coverage
To be exempt from _____, a 403(b) plan must:
-offer only ______ ______ as a contribution source, meaning no employer contributions
-The employer maintains very limited involvement with the plan such as depositing contributions, allowing vendors to explain their products, and providing ______ ______.
ERISA, Elective deferrals, investment choices
Contributions fund a definitely determinable benefit that is defined in the plan; subject to minimum funding rules and required to have actuarial certification each year; deduction equal to at least minimum funding amount. Does not permit elective deferrals
Defined benefit pension plan (Pension-defined benefit)
Contributions may be stated or discretionary; must have definite allocation formula; deduction limited to 25% of compensation (plus the deduction for elective deferrals, if any). Most common defined contribution plan
Profit-Sharing Plan (Nonpension-defined contribution)
Must have a definitely determinable contribution formula; subject to minimum funding; deduction limited to 25% of compensation, Elective deferrals if pre-ERISA plan. Significantly less popular due to required contributions.
Money Purchase Pension Plan (Pension-Defined Contribution)
Contributions may be stated or discretionary; must have definite allocation formula; deduction limited to 25% of compensation (plus the deduction for elective deferrals, if any). Allows elective deferrals. Required to invest primarily in employer securities and to pay benefits in the form of employer stock unless subject to an exception
Stock Bonus Plan (Nonpension defined contribution)
Contributions may be stated or discretionary; usually allocable proportionate to compensation. Generally subject to 25% deduction limitation, although greater deduction limit applies if plan is leveraged Allows for elective deferrals. Actually, a type of stock bonus plan; required to invest primarily in employer securities and to pay benefits in the form of employer stock unless subject to an exception. May borrow from employer or from a third-party lender with employer’s guaranty to purchase stock
Employee Stock Ownership Plan (ESOP)
Contributions determined actuarially based on definitely determinable target benefit formula, but limited to DC §415 limits and 25% deduction limit. Does not allow elective deferrals. Significantly less popular since new comparability and cross-testing became available
Target Benefit Pensions Plan (Nonpension-defined contribution)
Contributions are discretionary, but must be allocated proportionate to compensation; deduction limited to 25% of compensation. Allows elective deferrals. IRAs used to fund (no trust); contributions fully vested at all times; special eligibility and distribution rules apply; exempt from 5500 filing requirement
Simplified Employee Pension (SEP) (Nonpension-defined contribution)
Required matching or nonelective contributions. Allows elective contributions. IRAs used to fund (no trust); exempt from 5500 filing requirement; only available if there are less than 100 participants; lower elective deferral limits than for 401(k) plan
SIMPLE IRA plan (nonpension-defined contribution)
Required matching or nonelective contributions . Allows elective deferrals. Similar to SIMPLE IRA but in 401(k) plan, subject to Form 5500 filing requirements
SIMPLE 401(k) (Nonpension-defined contribution)
Required matching or nonelective contributions . Allows elective deferrals. Similar to SIMPLE IRA but in 401(k) plan, subject to Form 5500 filing requirements
SIMPLE 401(k) (Nonpension-defined contribution)
SIMPLE IRA ____ _______ establishes the plan and authorizes the employer to make _______.
Plan document,contributions
SIMPLE IRA _______ is the IRA vehicle that accepts contributions on the _______ behalf.
Document, employee’s
A SIMPLE IRA’s plan year must be the ______ year, regardless of the employer’s tax year.
Calendar
