Flash Cards
Important Numbers for 2015
Covered Compensation
Defined Benefit Maximum Limit
Defined Contribution Maximum Limit
401(k), SARSEP, 457, 403(b) Employee Deferral Limit
Highly Compensated Employee
Key Employee
Social Security Wage Base
Important Numbers – 2015
Covered Compensation
$265,000
Defined Benefit Maximum Limit
$210,000
Defined Contribution Maximum limit
$53,000
401(k), SARSEP, 457, 403(b) Employee Deferral Limit
$18,000
Highly Compensated Employee
$120,000
Key Employee
$170,000
Social Security Wage Base
$118,500
Pension Plan vs. Profit-Sharing Plans
- Legal Promise of the Plan
- Are in-service withdrawals permitted?
- Is the Plan subject to mandatory funding standards?
- Percent of plan assets allowed to be invested in employer securities
- Must the plan provide qualified joint and survivor annuity and a qualified pre-survivor annuity?
Characteristic
Pension Plan
Profit-Sharing Plan
Legal Promise of the Plan
Paying a pension at retirement
Deferral of compensation and taxation
Are in-service withdrawals permitted?
No*
Yes (after two years) if plan document permits
Is the plan subject to mandatory funding standards?
Yes**
No
Percent of plan assets available to be invested in employer securities
10%
Up to 100%
Must the plan provide qualified join and survivor annuity and a qualified pre-survivor annuity?
Yes
No
*Under the Pension Protection Act of 2006, defined benefit pension plans can provide for in-service distributions to participants who are age 62 or older.
**For plan years beginning in 2008, the funding rules under IRC Section 412 have been amended by the Pension Protection Act of 2006
Defined Benefit vs. Defined Contribution Plans
- Contribution Limit
- Investment Risk
- Forfeitures
Characteristics
Defined Benefit
Defined Contribution
What is the Annual Employer Contribution Limit?
Not less than the unfunded current liability
25% of covered compensation
Who assumes the investment risk?
Employer
Employee
How are forfeitures allocated?
Reduce plan costs
Reduce plan costs or allocate to other participants
Defined Benefit vs. Defined Contribution Plans (cont’d)
- PBGC
- Separate Investment Accounts
- Credit for Prior Services
Characteristics
Defined Benefit
Defined Contribution
Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage?
Yes (except professional firms with less than 25 employees)*
No
Does the plan have separate investment accounts?
No, they are commingled
Yes, they are usually separate
Can credit be given for prior service for the purpose of benefits?
Yes
No
*ERISA Section 4021, 29 U.S.C. Section 1321.
How are payroll taxes treated regarding plan contributions?
- Employers and emploees are exempt from payroll taxes on contributions to a qualified retirement plan, providing up to a 15.3% (12.4% OASDI and 2.9% Medicare tax) savings on taxes for employers contributions into a qualified plan.
- This payroll tax exclusion does not apply to employee elective deferrals to retirement plans such as 401(k), 403(b), SIMPLEs, SARSEPs, and 457 plans.
What are the standard eligibility requirements for qualified plans?
An employee is considered eligible to participate in the plan after completing a period of service that extends beyond the later of either the employee’s attaining age 21 or the completion of one year of service (defined as a 12 month period in which the employee works at least 1,000 hours).
What is the standard exception to the special eligibility rules?
- As an exception to the eligibility rule, a qualified retirement plan may require that an employee complete two years of service to be eligible for participation in the qualified retirement plan.
- If the employer elects this special exception for its qualified retirement plan, then plan participants are immediately vested in the accrued benefit or account balance upon completion of two years of service. This exception is not available for 401(k)s.
Characteristics of highly compensated employees
Owner Employees
Nonowner Employees
Either
An owner of > 5%* for current or prior plan year
or
Compensation in excess of $120,000 for 2015** for prior plan year
Compensation in excess of $120,000 for 2015** for prior plan year
*5% ownership may include ownership by spouse, children, grandchildren, or parents.
**If special employer election is made, add “and in top 20% of employees ranked by salary.”
What is the Defined Benefit 50/40 Test?
- The 50/40 coverage test requires the defined benefit plan to benefit the less of 50 nonexcludable (eligible) employees or 40% of all nonexcludable (eligible) employees on each day of the plan year.
**To remember that it’s 50 employees or 40%, remember “people come first”.
Characteristics of a Key Employee
- A key (decision-makers as opposed to just highly paid) employee is any employee who is any one or more of the following:
- A greater than 5% ownder, or
- A greater than 1% owner with compensation in excess of $150,000 (not indexed), or
- An officer with compensation in excess of $170,000 for 2015.
Characteristics and Requirement of a Top Heavy Defined Benefit Plan
- Definition
- Funding
- Vesting
Top Heavy Defined Benefit Plan
Definition
More than 60% of the total accrued benefits of the defined benefit plan are for the benefit of key employees
Funding
Must be at least 2% X years of service X compensation factor
Vesting
The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule
Characteristics and Requirements of a Defined Contribution Plan
- Definition
- Funding
- Vesting
Top Heavy Defined Contribution Plan
Definition
More than 60% of the total account balances of the defined contribution plan are for the benefit of key employees.
Funding
3% minimum to all eligible employees or less if less provided to key employees
Vesting
The plan participant’s benefits must vest at least as rapidly as a 2 to 6 year graduated vesting schedule or a 3-year cliff vesting schedule.
Defined Benefit Maximum Plan Limitations
Defined Benefit
Covered Compensation
$265,000 for 2015
Maximum Benefit
Lesser of:
- $210,000 for 2015 or
- Average of 3 highest consecutive years of compensation
Defined Contribution Maximum Plan Limitations
Defined Contirbution
Covered Compensation
$265,000 for 2015
Maximum Benefit
Lesser of:
- 100% of compensation or
- $53,000 for 2015 (not including catch-up provision)
What is the 25% Test?
- The 25% test consists fo two tests, a 25% test and a 50% test. The test used depends upon the type of life insurance provided by the plan.
- If a term insurance or universal life insurance policy is purchased within the qualified plan, the aggregate premiums paid for the life insurance policy cannot exceed 25% of the employer’s aggregate contributions to the participant’s account.
- If a whole life insurance policy is purchased within a qualified plan, the aggregate premiums paid for the whole life insurance policy cannot exceed 50% of the employer’s aggregate contributions to the participant’s account.
Characteristics of the Pension Benefit Guaranty Corporation (PBGC Insurance)
- The plan sponsors of defined benefit pensions plans pay premiums for insurance coverage designed to pay the “promised pension” in the event the plan is underfunded or unfunded.
- The PBGC pays only a limited retirement benefit ($5,011 per month or $60,136 per year (2015)) in the event of a plan completely or partially terminating with an unfunded or underfunded liability.
- The PBGC does not insure defined contribution pension or profit-sharing plans, and it does not insure defined benefit pension plans of professional service corporations with 25 or fewer participants.
- The PBGC does insure all other defined benefit plans and covered plans are required to pay a flat-rate, per participant premium.
Characteristics of Defined Benefit Pension Plans
- Actuary (Annually)
- Investment Risk Borne by
- Treatment of Forfeitures
- PBGC Insurance
- Credit for Prior Service
- Social Security Integration
- Separate Investment Accounts
- Favors Younger/Older
Characteristic
Defined Benefit Plans
Actuary (Annually)
Yes
Investment Risk Borne by
Employer
Treatment of Forfeitures
Must Reduce Plan Costs
PBGC Insurance
Yes
Credit for Prior Service
Yes
Social Security Integration
Offset or Excess
Separate Investment Account
No – Commingled
Favors Younger/Older
Older
Characteristics of Defined Contribution Pension Plans
- Actuary (Annually)
- Investment Risk Borne by
- Treatment of Forfeitures
- PBGC Insurance
- Credit for Prior Service
- Social Security Integration
- Separate Investment Accounts
- Favors Younger/Older
Characteristic
Defined Contribution Plans
Actuary (Annually)
No (except Target Benefit at Inception)
Investment Risk Borne by
Employee
Treatment of Forfeitures
Reduce Plan Costs or Allocate to Other Plan Participants
PBGC Insurance
No
Credit for Prior Service
No
Social Security Integration
Excess Only
Separate Investment Accounts
Yes – Separate (usually)
Favors Younger/Older
Younger
Characteristics of a Pension Plan
- Legal Promise of the Plan
- Are in-service withdrawals permitted?
- Is the plan subject to mandatory funding standards?
- Percent of plan assets allowed to be invested in employer securities
- Employer annual contribution limit of covered compensation
Characteristic
Pension Plan
Legal Promise of the Plan
Paying a pension at retirement
Are in-service withdrawals permitted?
No*
Is the plan subject to mandatory funding standards?
Yes
Percent of Plan Assets allowed to be invested in employer securities
10%
Employer annual contribution limit of covered compensation
25%**
* Defined benefit pension plans may allow in-service withdrawals for participants age 62 or older as a result of the PPA 2006.
**The plan must meet minimum funding standards. Defined benefit pension plans may exceed 25%.
Characteristics of a Profit-Sharing Plan
- Legal Promise of the Plan
- Are in-service withdrawals permitted?
- Is the plan subject to mandatory funding standards?
- Percent of plan assets allowed to be invested in employer securities
- Employer annual contirbution limit of covered compensation
Characteristic
Profit-Sharing Plan
Legal Promise of the Plan
Deferral of compensation and thus tax deferral
Are in-service withdrawals permitted?
Yes (after two years)
Is the plan subject to mandatory funding standards?
No
Percent of plan assets allowed to be invested in employer securities
100%
Employer annual contribution limit of covered compensation
25%***
***Increased form 15% by the EGTRRA 2001 for years after 2001
Characteristics of Permitted Disparity (Social Security Integration)
- Permitted disparity is a technique or method of allocating plan contributins to employee’s accounts so that a higher contribution will be made for those employees whose compensation is in excess of the Social Security wages base.
- Profit sharing plans only allow the excess method to be used.
- The excess rate is limited to the LESSER of twice the base rate or a difference of 5.7%. As a result the excess rate is generally 5.7% higher than the base rate.
List the entities which may establish a 401(k) plan.
Entities Which May Establish a 401(k) Plan:
- Corporations
- Partnerships
- LLCs
- Proprietorships
- Tax-exempt entities
Characteristics of a Roth IRA
- Contribution Limit
- Catch-Up Contirbution Limit
- Income Limit
- Conversion from a traditional IRA account allowed?
- Available for loans?
- Qualified Distributions (not subject to tax or penalty)
- Distributions that are not qualified
- Required Distributions
Characteristics
Roth IRA
Contribution Limit
$5,500 (2015)
Catch-Up Contribution Limit
$1,000 (2015)
Income Limit
Married $183k - $193k
Single $116k - $131k
MFS $10,000 MAGI (2015)
Conversion from a traditional IRA account allowed?
Yes
Available for loans?
No
Qualified Distributions (not subject to tax or penalty)
To be qualified, the account must be held for at least 5 years and the distribution must be made on account of a first time home purchase, disability, death, or on or after the attainment of age 59 ½.
Distributions that are not qualified
Specific Ordering Rules: contributions first, conversions second, and earnings third.
Required Distributions
Not subject to minimum distributions during owner’s lifetime.
NOTE: There is no income limit to convert to a Roth in 2015.
Characteristics of a Roth 401(k) Account
- Contribution Limit
- Catch-Up Contribution Limit
- Income Limit
- Conversion from a traditional IRA account allowed?
- Available for loans?
- Qualified Distributions (not subject to tax or penalty)
- Distributions that are not qualified
- Required Distributions
Characteristics
Roth 401(k) Account
Contribution Limit
$18,000 (2015)
Catch-Up Contribution Limit
$6,000 (2015)
Income Limit
No income limits. However, participant must have income for the deferral.
Conversion from a traditional IRA account allowed?
No
Available for loans?
Yes
Qualified Distributions (not subject to tax or penalty)
To be qualified, the account must be held for at least 5 years and the distribution must be made on account of disability, death, or on or after the attainment of age 59 ½.
Distribution that are not qualified
Distribution is determined under Section 72. Each distribution will consist of basis and earnings.
Required Distributions
Follows minimum distribution rules (i.e., distributions must begin by April 1 in the year following the year in which the participant reaches 70 ½.
Summarize various permissible levels of ADP for highly compensated employees based on contributions by non-highly compensated employees.
ADP Schedule
If the ADP for NHC Employees is:
The Permissible ADP for HC Employees is:
0% to 2%
2% to 8%
8% and over
2 times ADP for NHCs
2% plus ADP for NHCs
1.25 times ADP for NHCs
What are the 4 alternative remedies available if a plan fails the ADP or ACP tests?
-
Corrective Distributions
- Requires a return of contributions to the highly compensated. -
Recharacterization
- Requires excess deferrals to be recharacterized as after tax contributions -
Qualified Non-Elective Contributions (QNEC), or
- The employer makes a contribution to all non-highly compensated employee’s accounts -
Qualified Matching Contributions (QMC).
- The employer contributes to the non-highly compensated employees who made a contribution
Requirements of the Safe Harbor Match
If the employer elects to use a match rather than the non-elective contribution, the standard safe harbor match formula requires the employer to match 100% of the first 3% of employee elective deferrals and 50% of employee elective deferrals greater than 3% and less than 5%.
Examples of Distributions that are Allowed for CODA Type Plans
- The retirement, death*, or separation of service of the participant and attainment of age 55*;
- The termination of the plan without the establishment of another plan;
- Certain acquisitions of the company or company assets;
- The attainment of age 50 1/2 by the participant*; or
- Certain hardships
- Distributions on account of any of these items are taxable as ordinary income to the extent the participant does not have an adjusted basis in the 401(k) plan and may also be subject to a 10% penalty.
*NOTE: Not subject to 10% penalty.
