Qualified Plan Requirements Flashcards
What is required for the establishment of a qualified plan?
Must be established by tax filing date, including extensions
Plan must be in writing
Plans are often submitted to the IRS for determination letter
Must be communicated to employees
Intention must be permanent
Plan must not allow or have prohibited transactions
What is the standard eligibility for qualified plan that it cannot go below?
Age 21 and one year of service defined as 1000 hours worked in a consecutive 12 months period
Exception to this may require two years of service must have 100% vesting upon entry (not available for 401(k) plans)
Once an employee has met the eligibility requirements when can they enter the plan?
On the next available entrance date cannot make an employee wait more than six months
What is the minimum entrance dates you can have for a qualified retirement plan
Every six months, but you can do monthly quarterly or semi annually, etc.
The internal revenue code uses the terms 5% owners and one percent owners interchangeably. What does this mean?
The term 5% owner means that they own more than 5% so really it is 6%
The term one percent owner means they own more than one percent which really means they own 2% or more of the company
Who are the highly compensated employees?
At any time, a greater than 5% owner of the employer anytime during the current year or proceeding year or
Made more than $150,000 in 2023 or $155,000 in 2024
Family ownership rules applied to determine 5% and 1% percent owners
Who is considered a key employee?
An officer with compensation greater than $220,000 (2024)
A greater than 5% owner
Greater than 1% owner with compensation greater than $150,000
The general rule for qualified plans is the employer must cover what percentage of all eligible non-highly compensated employees.
What is that test called in? If it fails that test what other test must be passed?
Must cover 70% or greater of all eligible non-highly compensated employees. This is called the “Safe Harbor Test”
If the employer fails to safe Harbor test must be one of the other two test
The ratio test and the average benefits percentage test
If it is a defined benefit plan, it must also pass the 50/40 test
What is the ratio test?
% of NHC covered / % of HC covered = Must be equal or great that 70%
What is the average benefits percentage test?
Average benefits % NHC / Average benefits % HC = greater than or equal to 70%
What is the 50/40 test?
All define benefit pension plants must benefit no fewer than the lesser of the following
50 employees
Or 40% or more of all eligible (nonexcludable) employees
Note: for purposes of the 40% test, the plan does not have to consider employees who are not eligible for the plan. example employees who do not meet age and service requirements and excluded employees such as union employees, and non-resident aliens
Our employers permitted to design qualified plans to exclude certain classes of employees?
Yes, as long as the plan meets the coverage rules
However, lawyers may not exclude classes of employees based on age and service because they are already rules related to age and service
What are the attribution rules qualified plans?
Attribution rules apply to highly compensated and key employee definitions
An individual is considered as owning the stock owned directly or indirectly by or for:
Spouse
Children
Grandchildren
Parents
Also applies to ownership through states , partnerships, trust, etc.
When does an employees years of service typically begin?
On the hire date
What is the typical vesting schedule for a defined benefit pension plan that is not top-heavy?
Either Cliff vesting or great investing is used and must be either five year cliff fessing or 3 to 7 year graded vesting
5 five year Cliff vesting means the employee is 100% invested the fifth year
3 to 7 year great investing means the employee is vested at 20% in your three then adds 20% a year until fully vested at seven years
In a defined benefit pension plan that is not top-heavy choose vesting schedule that is faster than the five-year Clift or 3 to 7 grated vesting
Yes, as long as they are more generous can choose vesting schedules that vest 100% immediately
When do benefits become 100% vested are exceptions to the plans vesting schedule?
Plan termination, attainment of normal retirement age or death
What is top heavy vesting?
A top heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees
What is the minimum vesting schedule for a defined contribution and top-heavy vesting plans?
Must use as accelerated vesting
3 year cliff vesting or 2 to 6 year graded vesting
3 year cliff: fully vested year three
2 - 6 year graded: Employee is 20% vested in year two and increases 20% until they are 100% invested in year six
What are the minimum funding requirements a top-heavy plan must provide non-key employees?
DB plans - 2% times the number of years of service up to 20% (10 years)
DC plans - 3% of total compensation
Actual deferral percentage test (ADP)
This test applies to what plans ?
401k
Actual deferral percentage test (ADP)
What do the deferrals include?
Voluntary pretax employee contributions
Voluntary after tax ROTH 401k employee compensation
Actual deferral percentage test (ADP)
What is the test?
ADP = Actual deferrals divided by eligible employee compensation
Test 1: the ADP for the eligible, highly compensated employees (HC) group must not be more than the ADP non-highly compensated (NHC) group multiplied by 1.25
Test 2: the ADP for the eligible highly compensated employees group must not exceed the ADP for non-highly compensated employees group by more than 2% and the ADP for the eligible highly compensated employees group must not be more than the ADP for the eligible non-highly compensated employees group multiplied by 2
Actual contribution percentage test (ACP)
What qualified plans must use this test ?
Qualified defined contribution, retirement plans
Actual contribution percentage test (ACP)
What is it and how is it satisfied?
ACP = Actual contributions divided by eligible employee compensation
The requirement is satisfied if :
ACP for the highly compensated employees group cannot be more than 1.25 times the ACP for the non-highly compensated employees group
Average ACP for the highly compensated employees group must not be more than twice the ACP for the non-highly compensated employees group and must not exceed the ACP for the non-highly compensated employees group by more than 2%
Actual contribution percentage test (ACP)
Who all is it apply to?
Employer matching contributions
Mandatory employee contributions
Employee (after tax) contributions (excludes Roth 401(k) deferrals)
What are the corrections for ADP and ACP testing that falls outside the limits?
Corrective distribution (decrease HC)
Qualified non-elective contribution (increase NHC)
Qualified matching contribution (increases NHC)
Safe Harbor rule
What is it?
It is an alternative method of meeting nondiscrimination testing requirements
Employers can avoid ADP and ACP testing if the plan meets one of the safe harbor provisions
Safe Harbor contributions by the employer must be 100% vested at all times
Safe Harbor rule
Employer must make contributions but has the following choices ?
Matching contributions for non-highly compensated employees (NHC): 100% match up to 3% compensation plus 50% match contributions between 3% and 5% of compensation. Matching contribution percentages for the highly compensated employees cannot exceed those for non-highly compensated employees.
Non-elective contributions: employer may choose to make contributions of 3% or more of the compensation for all non-highly compensated employees who are eligible to participate in the plan, regardless of whether or not the employee chooses to participate
What are the compensation limits for qualified plans?
$345,000 for 2024
Meaning no more than $345,000 can be considered for contribution or benefit calculation purposes
The benefit paid from a defined benefit plan cannot exceeded the lesser of?
Hundred percent of the participants compensation average over the three highest consecutive years of compensation or
$275,000 for 2024 as indexed for inflation and is CPI adjusted in $5000 increments
What is the annual addition limit for all defined contribution plans sponsored by one employer cannot exceed the lesser of?
Hundred percent of the participants annual compensation or $69,000 adjusted for CPI
The annual additions include employer contributions, employee contributions, and forfeitures allocated to a participants account
What are the annual addition limits and employee can put into the multiple plans?
