Plan design considerations Flashcards
What does ERISA stand for?
Employee Retirement Income Security Act
ERISA was designed to ensure the security of company pension plans.
What year was the Employee Retirement Income Security Act (ERISA) enacted?
1974
What event highlighted the need for ERISA?
The closing of the Studebaker auto plant in 1963
What is the role of the U.S. Department of Labor (DOL) in relation to ERISA?
Administration and enforcement of ERISA
What does the Internal Revenue Code (IRC) refer to?
Tax laws passed by Congress and administered by the IRS
How does the Internal Revenue Code (IRC) relate to retirement plans?
It stipulates retirement plan rules and regulations that must be complied with
What agency enforces the provisions of the Internal Revenue Code (IRC)?
Internal Revenue Service (IRS)
What is the Pension Protection Act (PPA)?
The most comprehensive pension reform legislation since ERISA
In what year was the Pension Protection Act (PPA) created?
2006
What is significant about the Pension Protection Act (PPA)?
It is the largest piece of legislation in more than 30 years affecting employer pension plans
Fill in the blank: The U.S. DOL is responsible for the administration and enforcement of _______.
ERISA
True or False: ERISA was created to protect workers from losing their pensions.
True
List the three main regulations that dictate retirement plan design components.
- ERISA
- Internal Revenue Code (IRC)
- Pension Protection Act (PPA)
How was compensation defined in retirement plans?
All wages, salaries and other amounts received, including overtime Bonnes commissions tips includes pre-tax contributions
Define highly compensated employees
5% owners or those who earned more than the annually index compensation limit for HCE’s in the preceding year or at the election of the employer and are in the top 20% of employees one ran by compensation
What are the six design components of defined contribution plans?
Credited service
Eligibility
Enrollment
Contributions
Vesting
Distributions
How was credited service typically calculated
Credited hours instead of elapsed time
Using a lapsed time, makes it difficult to separate part time from full-time
When do the minimum participation rules include eligibility for a defined contribution plan
Within six months and Age 21 and one year of service
Two years of service if immediate vesting, (except 401(k)
Who can be excluded from participation in defined contribution retirement plans?
Certain groups covered under collective bargaining agreements, and nonresident aliens
What is a reason that a company may limit participation of employees to 21 and maximum limits allowed under the regulation
May help pass non-discrimination, testing challenges
What are the four types of employee contributions to a defined contribution plan?
Pretax
Post tax
Catch up
Roth
Are employee deferrals (contributions) included as income for FICA purposes?
Yes
In a pre-tax contribution to a qualified plan how do taxes impact contribution growth overtime?
Both the contributions made to the account and the investment gain continue to grow tax free until the money is withdrawn at retirement
How are post tax contributions impacted by taxes overtime
Only the investments gain or income, not the contributions themselves, enjoy the benefit of tax deferred growth
Define a fixed match employer contribution to a defined contribution retirement plan
A certain percentage of salary or a fixed dollar amount to match employees contributions
Define profit related in reference to employer contributions to a defined contribution retirement plan
A variable amount given, depending on amount of profits
In regard to employer contribution define what form of contributions are service related
Amount is determined by years of employment
In regard to employer contributions in forms of contributions, what is the combination type how is it defined?
Any combination of
Fixed match
Profit related
Service related
How are employer contributions taxed?
Employer, contributions are tax deductible however there is a maximum deduction for those employers who offer both defined benefit and defined contribution plans
In regard to employer contributions, what’s typical timing for making the contribution
Most companies make the contribution per pay period. Others make it after the end of the tax year
What IRS codes contain tax law limits on maximum compensation
IRS code 415
IRS code 402G
When are employee contributions considered vested?
Employee contributions are 100% vested
What are the legal requirements for all employer matching contributions in regard to vesting?
Three year cliff(100% after three years)
Or
2 to 6 year graded (20% a year)
Forfeiture represent benefits that were not 100% vested at termination. What can a company use for fixtures for?
Offset employer contributions
Reallocate to participants
Pay plan expenses
