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