Introduction to Qualified Plans (Lesson 1) Flashcards
What are the two types of defined benefit pension plans
- Defined benefit pension plans
- Cash balance pension plans
What are the two types of defined contribution pension plans
- money purchase pension plans
- target benefit pension plans
What are the 7 types of defined contribution profit sharing plans
- Profit sharing plan
- Stock bonus plans
- employee stock ownership plans
- 401(k) plans
- thrift plans
- new comparability plans
- age based profit sharing plans
What is the legal promise of the below plan:
Pension Plan
Profit Sharing Plan
Pension Plan - Paying a pension at retirement
Profit Sharing Plan - Deferral of compensation and taxation
Are in service withdrawals permitted for the below plan:
Pension Plan
Profit Sharing Plan
Pension Plan - No (unless 59 1/2 or older)
Profit Sharing Plan - Yes (after two years) if plan document permits
Are the below plans subject to mandatory funding standards:
Pension Plan
Profit Sharing Plan
Pension Plan - Yes
Profit Sharing Plan - No
What percent of the plan assets is available to be invested in employer securities for the below plans:
Pension Plan
Profit Sharing Plan
Pension Plan - 10%
Profit Sharing Plan - up to 100%
Do the below plans have to provide qualified joint and survivor annuity and a qualified pre survivor annuity:
Pension Plan
Profit Sharing Plan
Pension Plan - Yes
Profit Sharing Plan - No
What is the annual contribution limit for the below plans
Defined Benefit
Defined Contribution
Defined Benefit - Not less than the unfunded current liability
Defined Contribution - 25% of total employee covered compensation
Who assumes the risk for the below plans
Defined Benefit
Defined Contribution
Defined Benefit - Employer
Defined Contribution - Employee
How are forfeitures allocated for the below plans
Defined Benefit
Defined Contribution
Defined Benefit - reduce plan costs
Defined Contribution - reduced plan costs or allocate to other participants
Is the plan subject to Pension Benefit Guaranty Corporation (PBGC) coverage
Defined Benefit
Defined Contribution
Defined Benefit - Yes (unless less than 25 employees)
Defined Contribution - No
Does the plan have separate investment accounts
Defined Benefit
Defined Contribution
Defined Benefit - No they are commingled
Defined Contribution - Yes they are usually separate
Can credit be given for prior service for the purpose of benefits
Defined Benefit
Defined Contribution
Defined Benefit - Yes
Defined Contribution - No
What do qualified plans provide employees and employers with
Employers
- current income tax deduction
- payroll tax savings
Employees
- income tax deferrals
- payroll tax savings
- federally provided creditor asset protection
What is the percentage limit for total covered compensation paid to its employees as a contribution to a qualified plan
25%
Are contributions to a qualified plan subject to OASDI (6.2%) and Medicare tax (1.45%)
- Employer contributions are not subject to the payroll taxes
- Employee contributions are still subject to payroll taxes though
Are funds that are distributed from a qualified plan protected under ERISA
no
Are qualified retirement funds protected under ERISA from a Qualified Domestic Relations Order
- No
What are the advantages for an Employer for a qualified plan
- Employer contributions are currently tax deductible
- Employer contributions to the plan are not subject to payroll taxes
What are the advantages for an employee for a qualified plan
- Availability of pretax contributions for employees
- tax deferral of earnings on contributions
- ERISA protection
- Lump sum distribution options (10 year averaging, NUA, Pre-1974 capital gain treatment)
What are some of the disadvantages of a qualified plan
- limited contribution amounts
- contributions cannot be made after money is received
- plans usually have limited investment options
- no or limited access to money while an active employee
- distributions taxed as ordinary income
- early withdrawal penalties may apply
- mandatory distributions at age 72
- only ownership permitted is by the account holder
- cannot assign or pledge as collateral
- cannot gift to charity before age 70 1/2
- limited enrollment periods
- costs of operating the plan
What is the standard eligibility requirement for a qualified plan
- completing a period of service that extends beyond the later of either attainment of 21 or completion of one year of service (12 month period at least 1000 hours)
When can long term part time employees make elective deferrals to a qualified plan (after 12/31/20)
- Employee worked at least 500 hours per year for 3 consecutive years and is age 21 by the end of the 3rd consecutive year
What is the plan entrance date for a qualified plan
- employer may require employees to wait until the next plan entrance date after the employee has become eligible to join the plan as long as the next available date is not more than 6 months after the date of eligibility
- there are usually two plan entrance dates per year
What is the special eligibility rule for a qualified plan
- a qualified retirement plan may require that an employee complete two years of service to be eligible for participation in the plan
- if elected plan participants are immediately vested in their accrued benefit upon completion of two years of service (Not available for 401(k) plans)
When is a employee considered covered under a qualified retirement plan
Receives a benefit from the plan which means one of the below:
- employer contribution
- an accrued benefit
- simply the right to participate in the case of a 401(k) plan
What is the coverage test for qualified retirement plans
- general rule is cover at least 70% of nonhighly compensated employees with the ratio percentage test and average percentage test being exceptions
What additional test must a defined benefit plan pass
- the 50/40 test
What is a highly compensated employee for a qualified retirement plan
An employee who is either:
- more than 5% owner at any time during the plan year or preceding plan year or
- employee with compensation in excess of $130,000 for prior plan year
What is a 5 percent owner under the highly compensated employee definition
- owns more than 5% of the company’s stock or capital
- if exactly 5% not considered a HCE
- the family attribution rules apply to: includes stock owned by an individuals spouse, children, grandchildren, or parents as owned by one owner
What election can employers make in the qualified plan document to limit highly compensated employees
- those with compensation in excess of the annual limits and who are in the top 20% of paid employees as ranked by compensation
What is the general safe harbor coverage test for a qualified retirement plan
- plan benefits 70% or more of the eligible, nonhighly compensated employees
What is the ratio percentage test for a qualified retirement plan
% of NHC Covered / % of HC covered ≥ 70%
What are the two tests under the average benefits test
- AB% of NHC / AB% of HC ≥ 70%
- Nondiscriminatory test
What other test must a defined benefit plan must test
- 50/40 test
Does a noncontributory plan have to meet the actual deferral percentage (ADP) test
no
In order for a plan pass the nondiscriminatory test the plan must meet one of the two following tests
- safe harbor test = if the plans ratio test is greater than or equal to the employers safe harbor percentage
- facts and circumstances test = plans ratio percentage must be greater than or equal to the unsafe safe harbor percentage and the classification must satisfy a factual determination
What is the 50/40 test for defined benefit plans
- requires that defined benefit plans benefit the lesser of 50 eligible employees or 40% of all eligible employees on each day of the plan year
What is a cliff vesting schedule for employer contributions
- provides an employee full rights to the plans assets immediately upon the passage of a certain number of years of service
- Usually 3 years
What is a graduated vesting schedule for employer contributions
- provides an employee with full rights to a certain percentage benefit (less than 100%) after completing a certain number of years of service and
- provides the employee with an additional percentage for additional years of service
Is the deferred eligibility (2 years of service) available for 401(k)s
No
What are the vesting schedules for a defined contribution plan
- 2 to 6 year graduated
- 3 year cliff
- 2 year eligibility
What is the 2 to 6 year graduated vesting schedule for defined contribution plans
Year 1 - 0%
Year 2 - 20%
Year 3 - 40%
Year 4 - 60%
Year 5 - 80%
Year 6 - 100%
What is the 3 year cliff vesting schedule for defined contribution plans
Year 1 - 0%
Year 2 - 0%
Year 3 - 100%
Year 4 - 100%
Year 5 - 100%
Year 6 - 100%
What is the 2 year eligibility vesting schedule for defined contribution plans
Year 1 - 0%
Year 2 - 100%
Year 3 - 100%
Year 4 - 100%
Year 5 - 100%
Year 6 - 100%
What are the vesting schedules for Defined benefit plans
All Employer Contributions
- 3 to 7 year graduated
- 5 year cliff
- 2 year eligibility
Top Heavy Plans
- 2 to 6 year Graduated
- 3 year cliff Cash balance plan
- 3 year cliff
What type of vesting schedule must a cash balance plan use and is there any difference if it is a top heavy plan
3 year cliff
Year 1 - 0%
Year 2 - 0%
Year 3 - 100%
Year 4 - 100%
Year 5 - 100%
Year 6 - 100%
What type of vesting schedule must a top heavy defined benefit plan use
- 2 to 6 year graduated
- 3 year cliff
What is a 3 to 7 year graduated vesting schedule for a defined benefit plan
Year 1 - 0%
Year 2 - 0%
Year 3 - 20%
Year 4 - 40%
Year 5 - 60%
Year 6 - 80%
Year 7 - 100%
What is a 5 year cliff vesting schedule for a defined benefit plan
Year 1 - 0%
Year 2 - 0%
Year 3 - 0%
Year 4 - 0%
Year 5 - 100%
Year 6 - 100%
Year 7 - 100%
Can employer use a faster vesting schedule than the required ones
- yes however the vesting benefit must always be comparatively better than on of the approved vesting schedules and cannot provide a greater vested percentage as compared to one of the schedules in some years and in other years
What is the determination of service based on date of employment or date employee becomes eligible for the plan
- date of employment
For vesting what does an employer not have to count for the purposes of vesting
- years of service the employee acquired with the employer before reaching the age of 18 if the employee was not participating in the plan at the time
- years of service the employee attained before the employer sponsored a qualified plan
- years of service the employee attained during years when they did not contribute to an employee contributory qualified plan
What are the Top Heavy plans rules
- were designed to ensure that qualified plans that significantly benefit owners and executives of the company must provide some minimum level of benefits for the rank and file employees
What is a key employee
Any employee who is any one or more of the following:
- greater than 5% owner or
- greater than 1% owner with compensation in excess of $150,000 or
- An officer with compensation in excess of $185,000
Is compensation itself make an employee a Key employee
- No they must be an officer or owner
Who is considered an officer for the key employee test
- Sources of authority
- term elected or appointed is used
- means an administrator executive who is in regular and continued service
- No more than 50 employees must be treated as officers
How many employees can be treated as officers
- Max of 50
- if more than 50 then only the first 50 ranked by compensation will be considered
When is a defined benefit plan considered top heavy
- when the present value of the total accrued benefits of key employees in the plan exceeds 60% of the present value of the total accrued benefits for all employees
When is a defined contribution plan considered top heavy
- when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees
Once a plan is determined to be top heavy the plan must
- use top heavy vesting schedule and
- provide a minimum level of funding to non key employees
If a qualified defined benefit plan is deemed top heavy which vesting schedule should be used
- 2 to 6 year graduated or
- 3 year cliff
If a qualified defined contribution plan is deemed top heavy which vesting schedule should be used
- 2 to 6 year graduated
- 3 year cliff
If the plan is top heavy what is the minimum funding for a defined contribution plan
- must provide each nonexcludable nonkey employees a contribution equal to at least 3% of the employees compensation
- exception to the 3% rule is if they do not provide 3% they must provide a contribution equal to that of the key employees
If the plan is top heavy what is the minimum funding for a defined benefit plan
- must be at least 2% times years of service times compensation factor
What two tests must a Cash or deferred arrangement such as a 401k plan satisfy
- Actual contribution percentage (ACP) test for employer matching contributions and
- Actual deferral percentage (ADP) test for employee elective deferrals
What is the maximum amount of compensation that can be considered for the plan year
$290,000
What is the maximum benefit that can be provided under a defined benefit plan
- limit the employer to provide an employee with a benefit at retirement equal to the lesser of
- $230,000 or
- 100% of the average of the employees three highest consecutive years compensation during the time of plan participation
What is the maximum contribution per participant for a defined contribution plan
Lesser of:
- 100% of an employees compensation for the plan year or
- $58,000 for 2021
Under a defined contribution plan what is included for the maximum contribution amount
- employer contributions to plan
- employee contributions to the plan
- any forfeitures amount to be allocated from nonvested employees who terminated employment during the year
What is the maximum amount that employers can deduct for contributions to a defined contribution plan
- 25% of the employers total covered compensation
- covered compensation includes the compensation up to $290,000
Does the maximum deductible amount apply to defined benefit plans
- no because the employer is required to fund the defined benefit plan to the minimum funding standard determined by the actuary
What were controlled groups designed to prevent
- owners from splitting their business into multiple parts and creating multiple plans allowing for increased retirement contributions
When does a control group relationship exist
If the businesses have one of the following relationship:
- Parent subsidiary
- brother sister and
- combined group
What is a parent subsidiary relationship for a controlled group
- exists when one or more corporations are connected through stock ownership with a common parent corporation and
- 80% of the stock of each corporations is owned by one or more corporations in the group and
- parent corporation owns 80% of at least one other corporations
What is a brother sister relationship for a controlled group
- is a group of two or more corporations in which 5 or fewer common owners own directly or indirectly a controlling interest of each group and have effective control
- controlling interest generally means 80% or more of the stock of each corporation
- Effective control generally means more than 50% of the stock of each corporation. but only to the extent such stock ownership is identical with respect to such corporation
What is considered a controlling interest in a brother sister relationship
- controlling interest generally means 80% or more of the stock of each corporation
What is effective control in a brother sister relationship
- means more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation
What is a combined group
Consists of three or more organizations that are organized as follows:
- Each organization is a member of either a parent-subsidiary or brother sister group and
- at least one corporation is the common parent of a parent subsidiary and is also a member of a brother sister group
Why were the affiliated service group rules created
- were established because the ownership of companies could be arranged to avoid the controlled group rules
What are the affiliated service group rules
- treats all employees of the members of an affiliated service group as if a single employer employed them all
- affiliated service group means a group consisting of a service organization and one or more A or B organizations
- may also involve a management organization
