Module 2 Regulatory Issues for Retirement Benefits

Question 1

Define the following Retirement Plan Terms

Tax Qualified Plan

Vesting

Answer 1

■ Tax qualified plan — Benefits plan that qualifies under certain Internal Revenue Service (IRS) statutory requirements, consequently having certain tax advantages for employer and/or employee. To qualify, a plan must not discriminate in favor of highly compensated employees (HCEs).

■ Vesting — Granting an eligible employee the right to specified retirement benefits if they meet certain plan requirements

Question 2

What are the 2 typical types of Employer Sponsored Retirement Plans?

Answer 2

Defined Contribution

Defined Benefit

Question 3

What type of retirement plan is offered to Executives?

Answer 3

Senior Executive Retirement Plan (SERP)

Only about 10% of employers use SERPs

Question 4

What are the 6 primary Defined Contribution Plan types

Answer 4

Savings / Thrift
401 (k)
403 (b)
457 (b)
ESOP and Profit Sharing Plans
Roth 401 (k)

Question 5

What year was section 401K added to the IRC

Answer 5

1978

Question 6

What are the key attributes of a 401K plan?

Answer 6

– Employees regularly contribute a specific amount of income to the plan through payroll deduction.

– Employers typically match a specified percentage of employee contributions.

– Investments typically provide a broad range of mutual funds covering all major asset classes.

Question 7

how is a 403b plan defined?

Answer 7

A tax-sheltered annuity (TSA) offered by public schools and certain tax-exempt organizations. Generally they are funded by employee elective deferrals made under salary reduction agreements and non-elective employer contributions.

Question 8

How is a 457b plan defined?

Answer 8

– Similar to 401(k) — Catch-up contributions for participants age 50 and older are allowed.

A tax-deferred retirement plan available
to government employees and certain tax-exempt organizations. Employees defer compensation on a pretax basis through payroll deductions that further allow them
to defer federal and sometimes state taxes until the assets are withdrawn. Employers or employees contribute through salary reductions up to the prescribed limits.

Question 9

Define Employee Stock Ownership Plan (ESOP) and Profit Sharing Plans

Answer 9

Used as a vehicle to transfer stock
ownership in closely held or private organizations from owners to employees, may enable qualified employees to receive shares accrued as plan participants upon
retirement or separation from the
organization

Question 9

Define 401K Roth

Answer 9

contributions are made on a post-tax basis, are tax-deductible (with some exceptions)
and withdrawals are taxed at then-current rates. Some employers facilitate Roth IRA use and some offer a combination Roth 401(k) plan.

Question 10

Why do EMPLOYEES like DC Plans?

Answer 10

• Reduces taxable income on paycheck
• Employer may provide matching funds
• Usually has low or no minimum years of service to be eligible to participate
• Flexibility to invest in the funds chosen by the employee
• Employer contributions, once vested, belong to the employee and cannot be
  taken away even at termination
• Most plans have the option to withdraw funds via loan for use while still employed without penalty (afer age 59 1/2)

Question 11

what is the most popular type of DC plan and what percentage of employers offer them?

Answer 11

401K - 90% of employers offer them

Question 12

Why do employers like DC Plans?

Answer 12

■ These types of plans are more cost effective for the employer.
■ They may have a match or no match from the employer.
■ Matching can be made discretionary.
■ The employee bears the investment risk in these plans because the value of the investments in the account may vary over time.
■ Most employees who decide to participate in a DC plan a make regular contributions and will continue doing so.

■ Many (about 3/4th) employers with a DC plan will allow catch-up contributions.
Many (about 2/3rd) employers with a DC plan provide for hardship withdrawals.

Question 13

How is a DB plan Defined?

Answer 13

Defined benefit plans are often referred to as pension plans. As accountability for providing a secure retirement income has shifted from employers to employees, many of these plans have been frozen or terminated. Today, there are only about 1/4th of employers who still offer a defined benefit retirement plan.

Question 14

What are the 4 key characteristics of a DB Plan?

Answer 14

Most public employers are still using DB plans, sometimes supplemented with a DC plan also.
■ Specified benefit amount guaranteed — Employers ensure that employees have a specified benefit amount guaranteed at retirement for the remainder of their life.
■ Types of plans — The primary difference between various DB plans is the benefit formula used. The variables used in the formulas usually include age, earnings, and years of service.
■ Cost — Can be very expensive to employers. Thus, about 10% of employers with DB plans consider them “frozen”, unavailable to new employees.
■ Stacking — Sometimes workers are “stacking” these plans if the threshold to earn is only 15–20 years of service.

Question 15

Why do employees like DB Plans?

Answer 15

• Predictable income for the rest of life
• Employer pays for it
• Rewards years of service in formula
• May be stacked
  However, employers are offering this less often now.

Question 16

How does the IRS and DOL provide guidance to employers on retirement plans?

Answer 16

■ IRS determination letters — Generally apply to qualification requirements regarding the form of the plan. An employee retirement plan that is deemed qualified under IRC Section 401(a) is
entitled to favorable tax treatment. Most employers request advance assurance that the terms of their plans satisfy the qualification requirements and subsequently submit an application for a
favorable plan determination.
■ Private letter rulings — Issued by the IRS in response to a request from a specific qualified retirement plan sponsor or taxpayer. They reflect the IRS position with respect to the facts presented.
■ A DOL advisory opinion — A written statement issued to an individual or organization, or to the authorized representative of such individual or organization, that interprets and applies ERISA in a specific factual situation. Advisory opinions are issued only by the administrator of the Employee Benefits Security Administration or the administrator’s delegate.
■ Interpretive bulletins — Issued by the DOL, clarify the views expressed in advisory opinions and are intended to assist plan sponsors in their efforts to provide retirement savings opportunities.

Question 17

What does EGTRRA stand for?

Answer 17

Economic Growth Tax Relief and Reconciliation Act of 2001

Question 18

What is the purpose of EGTRRA?

Answer 18

• Encourage retirement savings and stimulate the economy through tax reductions and changes to qualified retirement vehicles

Question 19

What are the provisions (what does it provide) of EGTRRA in regard to Direct Benefit Plans?

Answer 19

– Increases defined benefits compensation limits
– Requires additional disclosure if plan amendment reduces rate of future benefit accruals (e.g., conversion to cash balance plan)

Question 20

What are the provisions (what does it provide) of EGTRRA in regard to Direct Contribution Plans?

Answer 20

• Increases pretax contribution limits and minimum vesting changes
  – Allows catch-up contributions for employees who turn 50 before the end of the calendar
  year for 401(k), 403(b) and 457 plans
  – Repeals multiple use test for ADP and ACP
  – Allows after-tax contributions
  – Permits automatic rollover (to IRA) of involuntary cash-outs over $1,000 unless plan participant elects another option
  – Allows tax credit of 50% of contributions to single employees with adjusted gross income (AGI) below $15K or employees filing joint returns with AGI under $30K
  – Repeals “same desk” rule affecting distributions in the event of an acquisition. Employees sitting at the “same desk” may now be eligible to take a distribution from the former employer’s plan under certain conditions.

Question 21

who is the enforcing agency for EGTRRA?

Answer 21

IRS

Question 22

What is the Pension Protection Act of 2006 (PPA)?

Answer 22

The framework that ERISA created for retirement plan design, funding, administration and communication was further enhanced through the passage of the Pension Protection Act (PPA) of
2006. The enactment of the PPA was prompted by defaults of several large underfunded defined benefit pension plans and the increasing deficit of the Pension Benefit Guaranty Corporation (PBGC).
The legislation was aimed at restoring stability to pension plans and strengthening the pension insurance system.

Question 23

What was the purpose of the PPA (Pension Protection Act - 2006?

Answer 23

• Overhaul/reform private sector employer pension and retirement plans, and both protect and encourage retirement savings

Question 24

What are the provisions of the PPA 2006?

Answer 24

* Strengthens plan reporting and participant disclosure rules * Requires stricter funding rules for single-employer and multiemployer defined benefit pension plans * Tightens rules governing how companies fund their pension plans, in hopes of eliminating the need for rescue by the PBGC * Makes significant changes in defined contribution rules to encourage automatic enrollment in 401(k) plans and to make it easier for 401(k) sponsors/plan fiduciaries to offer investment advice to plan participants * Resolves legal uncertainty surrounding cash balance and other hybrid defined benefit plans * Makes permanent significant retirement savings tax incentives enacted under prior law, including EGTRRA

Question 25

What agencies are responsible for enforcing the PPA 2006?

Answer 25

Employee Benefits Security Administration (EBSA), division of the Department of Labor, IRS and PBGC

Question 26

When did ERISA begin and what were the 2 main goals?

Answer 26

1974 1. To increase use of retirement plans among employers 2. To protect retirement funds in private industry

Question 27

What reporting and disclosure is required by ERISA for employers

Answer 27

Reporting is required to disclose plan information to the government and plan participants. ERISA requires plan administrators to give plan participants in writing the most important facts they need to know about their retirement (and health) benefit plans, including plan rules, financial information, and documents regarding the plan’s operation and management.

Question 28

Name 3 legal reporting requirements driven by ERISA

Answer 28

* 408(b)(2) requirements * Summary plan descriptions (SPDs) * Annual reports (Form 5500)

Question 29

what is required by 408(b)(2) required by ERISA

Answer 29

* Service provider disclosures * Transparency of fees and expenses

Question 30

What is form 5500 required by ERISA?

Answer 30

Annual Reports

Question 31

What are the 3 primary legal requirements to disclose information under ERISA?

Answer 31

■ Legal requirements — Legal requirements to disclose this information include: * 408(b)(2) requirements * Summary plan descriptions (SPDs) * Annual reports (Form 5500)

Question 32

How is a Fiduciary defined under ERISA associated with DC and DB plans?

Answer 32

Fiduciary: Any person with discretionary control over a plan’s management or assets

Question 33

Under ERISA what the Fiduciary's responsibilities?

Answer 33

Fiduciaries serve the needs of participants, minimize investment risk, follow plan documents and act with care, skill, prudence and diligence. * Plan administration — Includes those who exercise control or discretion over plan assets or plan administration (employer, plan administrator, trustee, etc.) * Investment advisors — Includes those who provide investment advice * Can be held personally responsible for breach of duty that causes loss to the plan

Question 34

What are ERISA provisions about mandatory requirement of employers to offer a retirement plan?

Answer 34

ERISA does not require an employer to offer a retirement plan - if the employer does offer a plan it must comply with ERISA provisions

Question 35

Under ERISA what are the 5 primary retirement plan participation rules?

Answer 35

* Eligibility * Credited service * Break in service * Re-employment * Survivor rights to employee benefits

Question 36

Considering ERISA eligibility rules, what are the rules around eligibility?

Answer 36

* Eligibility — The date an employee becomes eligible for benefits under an employee benefits plan – Within six months of – Age 21 and one year of service – Two years of service if immediate vesting [except 401(k)]

Question 37

Considering ERISA eligibility rules, what are the rules around Credited Service?

Answer 37

Period of service recognized in a benefit formula for retirement benefits calculation purposes. It is applicable to both DB and DC plans. – Two methods of determining 1. Credited hours — Counts the hours actually worked, generally one year of service equals 1,000 hours of service during an eligibility computation period 2. Elapsed time method — Based on periods of service, not hours worked, counted from date of hire to date of termination

Question 38

Considering ERISA eligibility rules, what are the rules around Break in Service?

Answer 38

Break in service (BIS) — Anniversary year during which a plan participant does not complete more than 500 hours of service and earns no retirement benefits. A break in service can have serious consequences for one’s pension if it extends for a long enough time and the pension benefit is not yet fully vested. – 500 hours or less when using the 1,000-hour rule – 1000-hour rule — If an employee works at least 1000 hours in a 12-month period and if the company has some kind of pension or retirement benefit plan, the company must give that employee the chance to participate in the plan.

Question 39

Considering ERISA eligibility rules, what are the rules around Re-employment after a Break In Services (BIS)?

Answer 39

* Re-employment (after a BIS) – Vested — Greater than five years of service, benefits – Not vested (five-year rule) — In general, guarantees service credit cannot be forfeited for absences shorter than 5 consecutive years.

Question 40

Considering ERISA Provisions around Vesting - when are employee contributions to a DC plan fully vested?

Answer 40

100% Vested imediately including earnings on that investment.

Question 41

What drives the Vesting rules for an employer retirement plan?

Answer 41

The plan document...

Question 42

what are 2 examples of vesting schedules for DC plans?

Answer 42

3 year cliff (100% after 3 years) Six year graded (20% a year after the second year)

Question 43

What are 2 examples of vesting schedules for DB plans?

Answer 43

5 year cliff (100% vested after 5 years) Seven year graded (20% per year after 3 years)

Question 44

In a DB plan, what is Plan termination Incurance?

Answer 44

Mandatory insurance — Administered by the Pension Benefit Guaranty Corporation (PBGC); employer pays annual premium to the PGBC * Protects participants if plan is terminated without adequate assets * PBGC pays vested benefit up to a statutory limit that is annually adjusted

Question 45

What section under ERISA provides fiduciary liability protection?

Answer 45

ERISA Section 404(c)

Question 46

Under ERISA section 404(c), what are the MINIMUM STANDARDS a retirement plan must meet to receive fiduciary liability protection under 404(c)

Answer 46

Minimum standards * Offer participants a broad range of investment alternatives * Diversification alternatives must include “three core choices.” * If a company stock fund is offered, it may not be one of the three alternatives. * Allow participants to change their investment choices “with a frequency that is appropriate in light of the market volatility of the investment options” (at least once per quarter) * Provide participants with sufficient information to make informed investment decisions * Investment elections/changes must be in writing and processed “promptly” by the plan administrator

Question 47

Under ERISA 404(c) what are the 5 main provisions that are required for an employer to meet fiduciary liability protection standards?

Answer 47

Meet Minimum Standards Information must be furnished automatically to plan participants Blackout periods Limited protection on investment mapping Default investment protection

Question 48

ERISA 404(c) define Blackout periods

Answer 48

■ Blackout periods * DC plans periodically change administrators and/or investment choices, thereby leading to temporary blackout periods where participants are unable to direct investment changes in their plan accounts. * Sarbanes Oxley requires the plan to provide a notice of blackout periods at least 30 days prior to the beginning of the period.

Question 49

What are investment mapping requirements to be covered under ERISA 404(c) Protection?

Answer 49

* Frequently, participant-directed DC plans decide to eliminate or replace one or more investment funds. * Part of that process often involves mapping, or automatically moving the assets in an old fund to a specified new fund with similar investment characteristics. * PPA provides that, if certain requirements are met, ERISA 404(c) protection will carry over to the investment in the new fund. It is a qualified change in investment option if certain conditions are met.

Question 50

Under ERISA 404(c) Fiduciary Liability Protection - what is the Default Investment Protection - what does QDIA stand for and what is it?

Answer 50

The Pension Protection Act (PPA) provides safe harbor for fiduciary's investing in default alternatives in the absence of participant direction. The default alternative must allow the participant to continue to exercise control over selection The QDIA (Qualified Default Investment Alternative) must be capable of meeting participants long term retirement savings needs (example: life-cycle fund)

Question 51

Describe Nondiscrimination Requirements for Retirement Plans

Answer 51

Qualified retirement plans must be designed to benefit a significant number of rank-and-file employees in comparison to highly compensated employees. To encourage this, plans are subject to a number of coverage and nondiscrimination rules.

Question 52

In consideration of retirement plan nondiscrimination rules, can a plan combine the benefits of a benefitted plan with Social Security to meet nondiscrimination testing criteria?

Answer 52

Yes

Question 53

Can employee and employer contributions be limited for HCEs to meet nondiscrimination testing criteria?

Answer 53

Yes

Question 54

If collective bargaining units have negotiated retirement benefits in good faith can bargaining unit employees be excluded from nondiscrimination testing?

Answer 54

Yes

Question 55

To prevent issues resulting from nondiscrimination testing what tools can be used to improve executive attraction and retention (improved retirement benefit)

Answer 55

Perks Stock Options Profit Sharing SERPs Golden or Platinum parachutes in the job offer.

Question 56

Considering Defined Benefit contributions, are employer and employee contributions mandatory?

Answer 56

■ Mandatory for employer — The contribution to a DB plan is mandatory on the part of the employer. The amount and frequency of an employer’s contribution is based on the actuary’s plan analysis. The actuary indicates a minimum and maximum amount for contribution and the employer determines a contribution amount somewhere between the two.

Question 57

In regard to a defined benefit retirement plan, can an employer reduce the contribution to a plan?

Answer 57

The employer can reduce the contribution if done in a timely manner. Methods for reducing the contribution include: * Change the funding method and/or assumptions. * Apply to the IRS for a funding waiver. * Amend the plan to reduce or eliminate future benefit accruals.

Question 58

What exceptions enable retirement distribution without a 10% penalty?

Answer 58

■ An additional 10% penalty tax applies for early distributions. Exceptions to this tax include: * Distributions over age 59½ * Substantially equal periodic payments for life * Death of participant * Medical expenses over 7.5% of adjusted gross income * Disability * Termination after age 55 * Alternate payee under qualified domestic relations order (QDRO)

Question 59

1. Which of the following is issued by the DOL in order to clarify views expressed in advisory opinions? A. Determination letters B. Interpretive bulletins C. Private letter rulings D. IRC briefs

Answer 59

B. Interpretive bulletins

Question 60

2. Which legislation was enacted to encourage retirement savings and stimulate the economy through tax reductions and changes to qualified retirement plans? A. Age Discrimination in Employment Act (ADEA) B. Pension Protection Act (PPA) C. Economic Growth Tax Relief and Reconciliation Act (EGTRRA) D. Employee Retirement Income Security Act (ERISA)

Answer 60

C. Economic Growth Tax Relief and Reconciliation Act (EGTRRA)

Question 61

3. The plan termination insurance provisions of ERISA apply to which of the following? A. Defined benefit pension plans B. Defined contribution plans C. Health and welfare plans D. Plans for government employees

Answer 61

A. Defined benefit pension plans

Question 62

in addition to serving the needs of participants, minimizing investment risk and acting with care, what is another responsibility of a fiduciary? A. Lend money or extend credit from the plan’s assets B. Exercise control over plan assets C. Allow participants to change investments choices at least weekly

Answer 62

B. Exercise control over plan assets

Question 63

5. To qualify for protection from fiduciary liability under ERISA Section 404(c), the plan must meet which one of the following requirements? A. Two diversified categories of investments must be available to plan participants. B. Three diversified categories of investments must be available to plan participants. C. Participants must be allowed to change investments at least once per month. D. Elections can be made through a variety of ways, including telephone, e-mail and fax.

Answer 63

B. Three diversified categories of investments must be available to plan participants.

Question 64

6. Section 410(b), the minimum coverage rule, tests for which of the following? A. Whether or not the plan’s contributions are nondiscriminatory B. Whether or not the plan’s coverage is nondiscriminatory C. Whether or not the plan has enough participants D. Whether or not the plan’s benefits are nondiscriminatory

Answer 64

B. Whether or not the plan’s coverage is nondiscriminatory

Question 65

7. The ADP/ACP nondiscrimination tests are imposed upon which one of the following retirement plans? A. Money purchase plan B. Individual retirement account (IRA) C. 401(k) D. Employee stock ownership plan (ESOP)

Answer 65

C. 401(k)

Question 66

8. Which of the following statements best describes the deductibility of employee contributions? A. All states allow employees to exclude deferrals from income for state income tax purposes. B. Deductibility includes employee after-tax contributions or 401(k) deferrals. C. Employees may deduct matching contribution and profit-sharing contributions. D. Employees may exclude deferrals from income for federal income tax purposes.

Answer 66

D. Employees may exclude deferrals from income for federal income tax purposes.

Question 67

9. If a plan participant elects to roll over their retirement plan assets, which of the following applies? A. The employee may not waive the 30-day notice requirement. B. Distributions may not be split; either all funds must be rolled over to a qualified plan or all funds retained as a distribution. C. A 20% federal withholding applies if the taxable portion of the distribution is not rolled over directly into another qualified plan or IRA. D. Written notice of the election must be given to the participant at least 45 days prior, but no more than 120 days prior, to the distribution.

Answer 67

C. A 20% federal withholding applies if the taxable portion of the distribution is not rolled over directly into another qualified plan or IRA.

Question 68

Examples of statutory requirements for pay to employee when not at work (time not worked)

Answer 68

Jury Duty Reserve duty and military leave (USERRA) Family Medical (FMLA) Voting

Question 69

What is the primary objective of the FLSA of 1938?

Answer 69

Define Workers Rights * Eliminate detrimental working conditions * Establish a minimum wage rate * Protect the educational opportunities of youth

Question 70

What size company (employer) is held to the standards of the FLSA? Under what definition?

Answer 70

Employers who are involved in interstate or foreign commerce are covered by the FLSA. FLSA coverage is broadly interpreted and includes nearly all employers of all sizes

Question 71

What percent of US employers fall under guidance of FLSA?

Answer 71

90%

Question 72

Are breaks and meals periods required under FLSA?

Answer 72

No- most states enforce meal and break time

Question 73

What duration of break is considered hours worked by FMLA?

Answer 73

any break between 5-20 minutes must be paid as they are considered hours worked.

Question 74

What agency enforces the FLSA standards?

Answer 74

US Department of Labor (DOL), administered by the wage an hour division