Module 1 Key Terms

Question 1

Internal Revenue Service (IRS)

Answer 1

Carries out administrative duties of the qualified retirement plan system.
Involves:
-Supervise the creation of retirement plans and operation of existing plans

-Interpreting federal legislation, tax consequences of pension plan

-Administrating the qualified plan system

Question 2

Employee Retirement Income Security Act
(ERISA)

Answer 2

Governs non-tax aspects of private retirement plans and employee benefits.
Qualified plans include:
Coverage, Participation, Vesting, Reporting/disclosure, Fiduciary Requirements

Requires plan sponsors to report to:
IRS, DOL, PBGC

Question 3

ERISA Sections (Titles)

Answer 3

Title I- Protects employees’ right to collect benefits and imposes nondiscrimination and funding requirements.

Title II- establishes plan qualification requirements for special treatment under the Internal Revenue Code.

Title III establishes plan qualification requirements for special treatment under the Internal Revenue Code.

Title IV-establishes plan qualification requirements for special treatment under the Internal Revenue Code.

Question 4

Department of Labor (DOL)

Answer 4

Involved in retirement plans through the Office of Pension and Welfare Benefit Plans. Oversees compliance with the prohibited transaction rules. Issues Prohibited Transaction Exemptions (PTE). Regulates plan fiduiaries. ONLY COVERS DEFINED BENEFIT PLANS.

Question 5

Pension Benefit Guarantee Corporation (PBGC)

Answer 5

Created under ERISA. Insures vested plan participants against loss of benefits from plan termination.
Benefit payments are financed by premiums paid by sponsors of defined benefit plans

Termination Rules:
1- Minimum funding is not met
2-Benefits cannot be paid when due
3-Long-run liability of PBGC is expected to increase reasonably

Question 6

The SECURE Act

Answer 6

Portability of lifetime income options for defined contribution plans, 403(b) plans, and governmental 457(b) plans.

Question 7

Qualified Plans

Answer 7

Meet requirements for IRC Section 401(a), Section 401(a), and ERISA. Regulations come from IRA and DOL. If meet requirements, they get immediate deductibility on all contributions made to the plan. Employer is not subject to payroll tax.

Question 8

Elements of a Qualified Plan

Answer 8

(a)-The plan document provides the terms and benefit amounts provided by the plan.

(b)-Once adopted, the plan is recognized as a separate legal entity (must be in writing)

(c)-The trust holds the plan assets. The trustee is usually selected by the employer.

(d)-The funds, once contributed, become the plan funds and, except in unusual circumstances, cannot be returned to the employer

Question 9

Non Qualified Plan

Answer 9

Flexible but don’t benefit from tax advantages or tax-advantaged plans
Don’t have to meet nondiscrimination requirements, can exceed IRC section 415 limits

Question 10

Plan Eligibility

Answer 10

12 months with 1,000 hrs worked
(21 and 1 Rule)
When the employer begins to make plan contributions on behalf of the participant. Must immediately vest all employer contributions to for employees

Question 11

Highly Compensated Employee (HCE)

Answer 11

1- Has greater than 5% owner (individual or family business) during the current or preceding year
2- In the preceding year had compensation greater than $135,000 (2022) and compensation exceeding $150,000 (2023)

Question 12

Non Highly Compensated Employee
(Non-HCE)

Answer 12

Don’t fit in HCE Criteria

Question 13

5% Owner

Answer 13

an individual who owns more than a 5% interest in the company

Question 14

1% Owner

Answer 14

Individual who owns more than 1% of the company

Question 15

Percentage Test

Answer 15

Section 410(b) of the Tax Code requires the employer-sponsor of the qualified plan to cover at least 70% of the eligible non-HCEs.

Question 16

Active Participation

Answer 16

For purposes of determining the deductibility of IRA contributions differs from being covered under a qualified plan.

Question 17

Ratio Test

Answer 17

the percentage of nonhighly compensated employees (non-HCEs) covered by the plan must be at least 70% of the percentage of highly compensated employees (HCEs) who are covered.
ratio test =
% of non-HCEs covered / % of HCEs covered
(≥70%)

Question 18

Average Benefits Percentage Test

Answer 18

the average benefits percentage accrued for non-HCEs as a group must be greater than or equal to 70% of the average benefits percentage accrued for the HCEs.

average benefits % non-HHCEs/ average benefits % HCEs
(≥70%)

Question 19

50/40 Test

Answer 19

All defined-benefit pension plans must be the lesser of 50 employees and 40% of eligible employees

Question 20

Controlled Group Rules

Answer 20

Prevent discrimination from Non- HCE. Employers that have a significant degree of common ownership are treated as a single employer
Includes:
Businesses that are related as either brother-sister or parent-subsidiary corporations (as defined in the Tax Code)

Question 21

Vesting

Answer 21

Occurs when an employee’s nonforfeitable right to receive a present or future retirement plan benefit is accrued over time, per the schedule identified in the employer-sponsored retirement plan document.
Exceptions of service:
1- Years before implementation of the plan
2- Years before 18

Question 22

Non-Top-Heavy

Answer 22

Defined benefit pension plan must vest at least as rapidly as one of the following two schedules:
FIve year 100% or cliff vesting:In this schedule, no vesting is required before five years of employee service, with 100% vesting then required at the end of five years of service.

Three-seven year graduated or graded vesting: Figure 1.3

Question 23

Top Heavy

Answer 23

A defined benefit plan that provides more than 60% of its aggregate benefits or
account balances to key employees

1- Must provide accelerated three year cliff or two to six year graded vesting
2- It must provide a minimum defined benefit accrual of 2% times the number of years of service (up to ten years) for all nonkey employees.

Question 24

Includable Compensation

Answer 24

Tax code imposes a limitation on plan benefits and contributions. Cap is $330,000

Question 25

Annual Additions Limit

Answer 25

Limitation for defined contribution plans is applied to the amount of annual contributions that may be made by employer and participant

Cannot exceed
1- 100% participants compensation or 330,000
2- 265,000 annually

Question 26

Forfeitures

Answer 26

Are nonvested amounts returned to the plan when a participant separates from service without being 100% vested.

Question 27

Catch up Contributions

Answer 27

Participant employees age 50 or older

Question 28

Contributory Plan

Answer 28

Employees make some contribution

Question 29

Noncontributory Plan

Answer 29

Employer pays all

Question 30

Permitted Disparity Rules

Answer 30

The law allows most qualified plans and the tax-advantaged SEP to utilize a concept known as Social Security integration

Question 31

Integrated Plan

Answer 31

Accounts for the disproportionate benefit accrual under Social Security and provides for a tiered benefit formula,

Question 32

Integration Level

Answer 32

The integration level is typically the Social Security taxable wage base ($160,200 in 2023), and the retirement plan provides a higher benefit for compensation above the integration level.

Question 33

Offset Method

Answer 33

a formula approximates the existence of Social Security benefits and reduces the plan formula

Question 34

Excess Method

Answer 34

the plan defines a level of compensation (referred to as the integration level) and then provides a higher rate of benefits for compensation above this level

Question 35

Defined Contribution Plan

Answer 35

can only be integrated with Social Security using an excess method of integration; the offset method is not permitted for defined contribution plans.

Question 36

Advanced Determination Letter

Answer 36

some employers apply to the IRS for a favorable ruling that the plan provisions meet the Tax Code requirements and is issued by the District Director of the IRS district in which the employer is located.

Question 37

Summary Plan Description

Answer 37

must be provided automatically to all
plan participants within 120 days after the plan is established or 90 days after a new participant enters an existing plan.

Question 38

Annual Report (5500 Series)

Answer 38

This must be filed with the IRS annually by the end of the seventh month period after the plan year ends. The Form 5500 is also required to be filed with the DOL, so it consolidates annual report forms for the IRS, DOL, and PBGC.

a. Have fewer than 25 participants
b. Are eligible for the small plan audit waiver
c. Hold no employer securities
d. Have 100% of assets in investments that have a readily determinable fair market value

Question 39

Summery Annual Report (SAR)

Answer 39

This summarizes the basic information included in the Form 5500 series, and must be provided to plan participants each year within nine months of the end of the plan year. Participants also have a right to see the full annual report (Form 5500 series) if they need information about the plan’s financial status.

Question 40

Individual Accrued Benefit Statement

Answer 40

This must generally be provided to a plan participant within 30 days of the request. Under the Pension Protection Act (PPA), defined contribution plans must provide benefit statements at least quarterly to participants who direct their own investments and annually to those who cannot.

Question 41

Summery of Material Modification SMM

Answer 41

This will explain any substantive changes, such as vesting provisions, that occurred to the SPD within the past year, and must be issued as needed.

Question 42

Fiduciary

Answer 42

ERISA specifies that any investment adviser who renders investment advice for a fee

Question 43

Prohibited Transaction

Answer 43

-the sale, exchange, or lease of any property between the plan and a party in interest;
loans between the plan and any party in interest;
- the transfer of any plan assets or use of plan assets for the benefit of a party in interest;
- the plan’s acquisition of employer securities or real property in excess of legal limits; and
- self-dealing, which is when a fiduciary acts in his own best interest in a transaction rather than in the best interest of his clients

Question 44

Definitely Determinable Benefits

Answer 44

Qualified plans are obligated to pay retirement benefits according to the details promised by plan