More Qualified Plan Rules and Options Flashcards
Deduction limits - Section 404c
- employer can only deduct a max of 25% of all participants eligible compensation
- individuals may receive contributions in excess of 25% as long as company contributions don’t exceed 25% and don’t violate rules of discrimination
Defined contribution limits
- section 415 limit applies to all DC plans
- it limits annual additions (employer contributions, employee salary reductions, and plan forfeitures) to lesser of 66k or 100% of salary
max 415 limit - (deferrals + match + forfeitures) = excess allowed
Section 415 - exceeds limit
- excess may be reallocated among other employees whose 415 limit has not been exceeded
- excess may be applied in a later year to the same employee (funds held is suspense)
- excess may be used to reduce future plan contributions
Annual compensation limit
- only the first $330k of each employee’s comp is taken into account for purposes of this contribution limit
Definition of compensation
- only includes taxable compensation paid or accrued during tax year
- also includes elective deferrals under section 401k and 457
- generally includes salary reduction contributions to section 125 (FSAs)
- inclusion or exclusion is determined by plan document
Contributed vs deferred
- contributions made by the employer
- deferrals made by the employee
Elective deferrals for workers with more than one employer
Aggregated as shown
- 401k/403b/SIMPLE/SARSEP : 22,500 max and 7,500 catch up
- SIMPLE and another SIMPLE : 15,500 max and 3,500 catch up
Annual additions
- limited to lesser of 100% of comp or 66k
- if multiple accounts: limit is aggregate to all accounts when plans are offered by single employer or two or more related employers
- limit is separate if unrelated employer plans
Keogh plans
- qualified retirement plan for sole proprietorship and partnerships
- can operate as DB, MPP, or PSP
Corporate plan
- employee contribution is based on net earning instead of salary
- net earning = employee net income after all deductions + net C income
- deduction of 1/2 self employment tax must be taken before determining deductible contribution
Keogh plans - calculation
Step 1: take net schedule C income
Step 2: multiply by 12.12% for 15% contributions
or multiply by 18.59% for 25% contributions
- calculate percent = plan conribution percent / (1+ plan conribution percent)
- calculation also for self-employed SEP
long way - Step 2: reduce by SE tax (net income * .07065)
Top heavy plan - definition
- DC top heavy if more than 60% of total amount in accounts of all employees is allotted to key employees
Top heavy - key employees
- greater than 5% owner
- officer and compensation greater than 215k
- greater than 1% owner and compensation greater than 150k
Top heavy - vesting
- more than 60% of aggregate accrued benefits or account balances are allocated to key employees
Top heavy - effects on contributions or benefits
- top heavy plan must provide minimum benefits or contributions to non key employees
DB - benefit must be at least 2% of comp multiplied by number of employees years of service (up to 10)
- B second letter of alphabet, use 2%
DC - minimum contribution must be no less than 3% of each nonkey employees comp
- c is 3rd letter, 3%
Loans from qualified plans
- Section 72p allows participants to borrow from their plans on a tax free basis following requirements
1. require repayment
2. dont exceed lesser of 50% vested benefit or 50k (special rule small accounts up to 10k)
3. repaid over period not exceeding 5 years(unless used for residence or quit)
4. made in level installments at least quarterly - if failure, deemed taxable and subject to 10% penalty if before 59 1/2
