Module 3 Flashcards
What makes a plan qualified? 3-1
IRC AND ERISA STANDARDS ARE MET. VESTING. NOT OVERLY DISCRIMINATORY
Defined benefit plan 3-1
Pension plan in which amount to be received in Retirement is determined in advance.
What are tax advantages for employees in a qualified plan? 3-1
Investments grow tax deferred
Employer contributions are not taxable income
Lump sum distributions may be able to use forward averaging when calculating taxes
What tax benefit does the employer sponsor receive from a qualified plan? 3-1
The employer can deduct the cost of the plan from current taxable income
Identify and describe the two major types of qualified plans. 3-1
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
What are the four potential sources of payments a participant may receive Ina defined contribution plan? 3-1
Employee contributions
Employer contributions
Forfeitures
Investment growth
Type of qualified plan where the investment risk is borne by the employer? 3-1
Defined benefit plan
Type of qualified plan where the investment risk is borne by the employee? 3-1
Define contribution plan
Type of qualified plan where the profits of the company will affect the level if retirement benefit? 3-1
Defined contribution plan; in this case a profit sharing plan
Type of qualified plan where the participant knows in advance the level of retirement benefit? 3-1
Defined benefit plan
A company with wide fluctuations in its earnings would fine a Profit sharing plan appealing because …3-2
The plan only has to specific how it will distribute the profits to the participants. A profit sharing contribution is not a requirement annually.
What are the mIn features of an age weighted profit sharing plan? 3-2
Employer contributions based on compensation and age using actuarial assumptions to benefit older employees.
What are the characteristics of a cross- tested profit sharing plan? 3-2
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.
What are the main features of a stock bonus plan? 3-2
Generally a profit sharing plan where the employer contribution is in the form of stock
Describe the characteristics of an employee stock ownership plan ESOP? 3-2
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.
What is a money purchase plan? 3-2
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.
Describe a target benefit plan. 3-2
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
Describe the unique characteristics of 401K plans and current maximums. 3-3
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.
What are the tax benefits to employees electing to defer salary through a 401k plan? 3-3
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.
Describe the concept of vesting and employee vesting in his account. 3-3
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.
Describe non-discrimination testing in 401k plans. 3-3
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.
Describe the main features of a 401k safe harbor plan. 3-3
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.
Describe the basic characteristics of a Roth 401k program. 3-3
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.
Describe the main features of a Keogh plan. 3-4
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.
