Formulas + Tests Flashcards
Actual Deferred Percentage Test (ADP)
a non-discrimination test that limits employee elective referrals for highly compensated employees based on the elective default of non-highly compensated employees.
Actual Contribution Percentage Test (ACP)
a non-discrimination test that limits the sum of employee after tax contributions and employer matching contributions for the highly compensated (HC) I’m here. I’m here based on the sum of employee after tax contributions and employer matching contributions for the non-highly compensated (NHC).
Safe Harbor 401(k) Plans
a 401k plan that satisfies a minimum contribution or matching test and allows the plant sponsor to bypass the ATP test, the ACP test, and the top-heavy tests.
Age-based Profit-sharing Plan
STEP #1 – Find PV of $1
N= 65-age
i = contribution rate
PMT = 0
FV = 1
STEP #2 –
Get Allocation Factor + Percentage Overall (all employees)
PV of $1 x compensation = allocation factor (age-weighted compensation)
STEP #3:
allocation factor # ÷ total allocation # overall (add everyone)
General Safe Harbor Test
% of NHC covered ≥ 70%
Ratio Percentage Test
(% of NHC covered ÷ % of HC covered) ≥ 70%
Average Benefits Test (both tests)
(AB% of NHC ÷ AB% of HC) ≥ 70% AND nondiscriminatory test
Defined Benefit 50/40 Test
(1) 1 Nonexcludable Employee = 1 employee must be covered
(2) 2-4 Nonexcludable Employee = 2 employees must be covered
(3) Less than 125 Nonexcludable Employees = 40% employees must be covered
(4) More than 125 Nonexcludable Employees = 50 employees must be covered
PASS = plan covering lesser of: 50 employees or 40% of employees
Anti-Cutback Rule
Protect employees and participants from changes made by the employer with the intent of simply reducing the cost of the plan. Benefits already accrued cannot be retroactively reduced through amendment.
25 Percent Test
(1) Term or Universal Life Insurance Policy =
Aggregate policy premiums cannot exceed 25% of the employee’s aggregate contributions
(2) Whole Life Insurance Policy =
Advocate life insurance policy premiums cannot exceed 50% of the employers’ aggregate contributions
(3) Permanent Life Insurance Policy (not term) =
Entire life policy must be either converted to cash or an annuity at or before the participants’ retirement or distributed to the participant
100-1 Ratio Test
ONLY FOR DEFINED BENEFIT PENSION PLANS
Limits the amount of the death benefit of the insurance coverage purchased to 100 times the monthly-accrued retirement benefit
Actuarial Assumptions + Relationships to Cost
DIRECT RELATIONSHIPS – changes and impact of costs both increase
(1) Expected Inflation
(2) Expected Wage Increases
(3) Life Expectancy
INDIRECT RELATIONSHIPS – increase in changes, less impact of cost
(1) Expected Investment Returns
(2) Expected Mortality
(3) Expected Forfeiture / Employee Turnover
Forfeitures
Defined Benefit = only reduce plan costs
Defined Contributions = reduce plan costs or allocate to others
Credit for Prior Service
Defined Benefit = Yes
Defined Contribution = no
Integration
Defined Benefit = Excess or Offset
Defined Contribution = Excess only
Offset Method
(1) 0.75% per year of service up to 35 years
(2) 50% of overall benefit funding % per year of service
Flat Amount Formula
Each participant gets the same amount
Flat Percentage Formula
Benefit is a percentage of salary (usually final salary or average of highest salary). Does not increase ever.
Unit Credit Formula
2% x # years of service x average of 3 highest annual salaries
3-percent Test
satisfied if the accrued benefit to which each participant is entitled upon the participant separation from the service is at least 3% of the normal retirement benefit to which the participant would be entitled if the participant commence participation at the earliest possible entry age under the plan and served continuously until the earlier age of 65 or the normal retirement age specified under the plan multiplied by the number of years (not an excess of 33.3) of participation in a plan.
133 1/3 Percent Rule
accrued benefit payable at the normal retirement age is equal to the normal retirement benefit and the annual rate at which any participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133.3% percent of the annual rate at which the participant can accrue benefits for any prior plan year.
