Module 3

Question 0

What makes a plan qualified? 3-1

Answer 0

IRC AND ERISA STANDARDS ARE MET. VESTING. NOT OVERLY DISCRIMINATORY

Question 1

Defined benefit plan 3-1

Answer 1

Pension plan in which amount to be received in Retirement is determined in advance.

Question 2

What are tax advantages for employees in a qualified plan? 3-1

Answer 2

Investments grow tax deferred
Employer contributions are not taxable income
Lump sum distributions may be able to use forward averaging when calculating taxes

Question 3

What tax benefit does the employer sponsor receive from a qualified plan? 3-1

Answer 3

The employer can deduct the cost of the plan from current taxable income

Question 4

Identify and describe the two major types of qualified plans. 3-1

Answer 4

Defined benefit plan identifies in advance the $ amt or % for qualified participants based on an actuarial assumption.
Defined contribution plan determines the benefit ultimately received by the participant based in contributions and investment performance. Q

Question 5

What are the four potential sources of payments a participant may receive Ina defined contribution plan? 3-1

Answer 5

Employee contributions
Employer contributions
Forfeitures
Investment growth

Question 6

Type of qualified plan where the investment risk is borne by the employer? 3-1

Answer 6

Defined benefit plan

Question 7

Type of qualified plan where the investment risk is borne by the employee? 3-1

Answer 7

Define contribution plan

Question 8

Type of qualified plan where the profits of the company will affect the level if retirement benefit? 3-1

Answer 8

Defined contribution plan; in this case a profit sharing plan

Question 9

Type of qualified plan where the participant knows in advance the level of retirement benefit? 3-1

Answer 9

Defined benefit plan

Question 10

A company with wide fluctuations in its earnings would fine a Profit sharing plan appealing because …3-2

Answer 10

The plan only has to specific how it will distribute the profits to the participants. A profit sharing contribution is not a requirement annually.

Question 11

What are the mIn features of an age weighted profit sharing plan? 3-2

Answer 11

Employer contributions based on compensation and age using actuarial assumptions to benefit older employees.

Question 12

What are the characteristics of a cross- tested profit sharing plan? 3-2

Answer 12

Sometimes called “new comparability plan” which weights employer contributions more heavily toward highly compensated participants. It provides the 1. Same percentage contribution for key personnel and shareholders regardless of age and 2. Provides the same % contribution to all other employees based on compensation.

Question 13

What are the main features of a stock bonus plan? 3-2

Answer 13

Generally a profit sharing plan where the employer contribution is in the form of stock

Question 14

Describe the characteristics of an employee stock ownership plan ESOP? 3-2

Answer 14

Provides qualified company stock to employees as a reward for years of service. This plan provides cash flow to company, transfers ownership, a market for employers stock, provides cash flow, financing for business growth, and estate planning for owners.

Question 15

What is a money purchase plan? 3-2

Answer 15

A defined contribution pension plan where the employer must provide a fixed % to employees account up to the lesser of $51K or 100% of compensation; annual contributions include employer employee and forfeitures. Biggest negative to employers it requirement to contribute annually regardless of profitability.

Question 16

Describe a target benefit plan. 3-2

Answer 16

A defined contribution pension plan that establishes a fixed contribution formula based on initial actuarial information to meet target benefit level. The target level may or may not be reached based on investment performance. Annual employer contributions are maxed at 25% of compensation. Annual max from all sources is $51k or 100% of compensation. A hybrid of a DB (actuarial) AND DC (employer contributions to separate accounts) plan

Question 17

Describe the unique characteristics of 401K plans and current maximums. 3-3

Answer 17

Unlike money purchase plans, profit sharing plans, and other qualified plans, the 401k is bases on the contributions of the employees, who can defer up to $17500 (2013) of salary each year. Employers are allowed to match these contributions.

Question 18

What are the tax benefits to employees electing to defer salary through a 401k plan? 3-3

Answer 18

By deferring salary or bonus money through a 401k an employee reduces his taxable income by the contribution and investment returns are tax deferred. They may also qualify for forward averaging distributions.

Question 19

Describe the concept of vesting and employee vesting in his account. 3-3

Answer 19

Vesting is the process that determines what percentage of a retirement account an employee actually owns and can take with them when they leave their employer. Usually vesting is after several years of service and often by degrees (e.g. 50% vested after x yrs and 100% vested after y yrs). An employee is always fully and immediately vested in the contributions he makes through salary reductions.

Question 20

Describe non-discrimination testing in 401k plans. 3-3

Answer 20

To qualify for favorable tax treatment plans that allow salary reduction contributions must insure the average actual deferral percentage (ADP) of highly compensated employees (HCE) does not exceed the ADP of other employees by x amount. Non HCE tend to not participate or participate a minimal amount or choose to receive cash; companies encourage participation with matching contributions. A similar test, the actual contribution percentage (ACP) test, is required for plans that provide an employer match and/or permit employees to make after tax contributions.

Question 21

Describe the main features of a 401k safe harbor plan. 3-3

Answer 21

Since 1999 safe harbor plans provide same as a 401k for tax deferrals and tax deductibility limits as well as allowing employees to participate in other qualified employer sponsored plans. Employers can make matching contributions such as up to 3% for all non HCE and 100% match or a 50% match for 3-5% deferrals. The HCE match cannot exceed non HCE and any matching or non elective contributions are 100% vested immediately with no gradual vesting. Any other profit sharing contributions could be subject to vesting. A non elective contribution must be 3% for all non HCE. Salary matches of >6% are not w/i safe harbor and are subject to ACP. If matching up to 1% is $ 4 $ then 1-6% can be matched at 6% with 100% vesting after 2 yrs of service (cliff vesting) with other regular profit sharing subject to gradual vesting.

Question 22

Describe the basic characteristics of a Roth 401k program. 3-3

Answer 22

A portion up to 100% of contribution can be made to a Roth 401k which grows tax free. The contribution is taxable income and contribution is subject to phaseout between $178-188k if filing jointly.

Question 23

Describe the main features of a Keogh plan. 3-4

Answer 23

A Keogh is qualified plan only for sole proprietorships and partnerships providing tax deductible contributions which grow tax deferred. The owners plan percentage must be provided to any employee.

Question 24

What are the maximum levels of contribution to a Keogh plan? 3-4

Answer 24

If a Keogh is a profit sharing plan; the maximum contribution rate is lesser of 20% (not 25%) times a self-employed’s NET earnings (determined by schedule C net profit less allowed deductions but not Keogh contributions) or $51k and earned income cannot exceed $255k (net earnings from business after all deductions including Keogh contributions). A Keogh can provide common law employees the lesser of up to 25% or $51k (includes up to $17500 elective deferrals and employer contributions and the $5500 catch up for 50+ year olds) under a money purchase or profit sharing plan. It the Keogh is a 401k Profit sharing plan then the max is 20% (not 25%) if the the employees net earnings. If it is a DB then the max allowable benefit is the lesser of 100% of income or $205000 per year. Earned income up to $255k may be taken into account in determining a self-employed individuals defined benefit. Each year an ACTUARY must determine the required funding and certify the plan is adequately funded.

Question 25

How are the annual benefits of a defined benefit plan generally determined? 3-5

Answer 25

Two methods generally chosen are average annual pay or last 3 or 5 years pay using the formula ( method chosen pay x % of pay x yrs of service)

Question 26

What are the defined benefit plan benefit formulas and examples of each? 3-5

Answer 26

Unit benefit % - 1,63% of final year compensation
Unit benefit $ - $150/yr of service ( max 25 yrs)
Flat or fixed benefit - 50% of last 3 yrs average compensation.
Flat or fixed $ - $1000/month
Cash balance - contribution to each participants hypothetical account equal to 6% of compensation
Pension equity - % of last 3 yrs avg. pay based on formula and given in lump sum. Ex. 4% x comp 4 ea yr 1-15 and 6% for yrs 16-30; under this plan employee would receive 150% of final avg. compensation.

Question 27

Describe the characteristics of a cash benefit plan. 3-5

Answer 27

An applicable DB plan where accrued benefit is balance of hypothetical participant account or % of final average compensation. The account is credited annually with a “pay credit” and an “interest credit”. The interest credit is fixed or variable as required by law and continues if a participant leaves employment and defers distribution. The employer’s contribution goes up or down per the actuary each according to previous year’s performance.

Question 28

Describe the characteristics of a pension equity plan. 3-5

Answer 28

An applicable DB plan where accrued benefit is typically %of final average pay determined by accrued “points” which are weighted to benefit older or longer service employees. “Interest credits” are commonly provided between termination and distribution. Benefits may be paid in a lump sum.

Question 29

Describe the provisions of retirement plans designed for nonprofit entities. 3-6

Answer 29

Section 403b of IRC makes plans available to schools and nonprofits with limits and catch up provisions similar to a 401k. A unique provision is the “special catch up” allowed near retirement. Employees and employers (of schools and certain healthcare participants) are able to make the special catch up contribution.

Question 30

Describe the characteristics of a Roth 403b contribution program. 3-6

Answer 30

In the Roth 403b there is no haste out limit for HCEs. The contribution is post tax. All other 403b limits apply.

Question 31

Describe the provisions of a section of the IRC 457 plan. 3-6

Answer 31

In a 457 plan state and local governments participate in deferred salary reductions. The unique feature of a 403b plan is the ability of the participant to also participate in another qualified plan effectively doubling their potential contribution. 50+ employees may be eligible for a “special catch up” provision which they can choose or stick with the 50+!$5500 catch up but not both. The plan is NON QUALIFIED.

Question 32

Describe the characteristics of a Roth 457b contribution program. 3-6

Answer 32

The section 457b of the IRC allows for a Roth contribution program. Contributions are post tax with no phaseout for HCEs.