Qualified Plan Rules and Options

Question 1

Qualified plans (DB/DC)

Answer 1

1. ERISA rules
2. eligibility: age and service
3. top heavy rules
4. vesting schedule
5. coverage testing/ ADP and ACP
6. cross testing (except ESOP)
7. integration with SSA (except ESOP)
8. multiple plan rules
   - aggregate deferrals
   - annual additions
9. investment suitability (UBTI/ LI)
10. lump sum distribution (10 yr)
11. rollover
12. distributions (20% withholding, possible 10% penalty)
13. QP penalty exceptions
14. RBD (73 or separation from service)
15. OJSA/QPRA/QDRO
16. creditor protection
17. deductibility of contribution
18. generally must establish in the tax year for which the sponsor wishes to take the deduction ( safe harbor and SIMPLE exceptions)

Question 2

Nonqualified retirement plans

Answer 2

1. no ERISA rules
2. eligibility: age and service (SIMPLE - none) (SEP 3/5/$750)
3. no top heavy rules (SEP auto satisfied)
4. no vesting schedule (SEP immediate)
5. no coverage testing/ ADP and ACP
6. no cross testing (except ESOP)
7. integration with SSA (SEP only)
8. multiple plan rules
   - aggregate deferrals
   - annual additions
9. investment suitability (IRA rules, no LI)
10. no lump sum distribution (10 yr)
11. rollover - IRA rules
12. distributions (possible 10% penalty) (SIMPLE 25% first 2 years)
13. IRA penalty exceptions
14. RBD (73)
15. NO OJSA/QPRA/QDRO
16. varying creditor protection (state law)
17. deductibility of contribution subject to phase out
18. establish date varies by type of plan

Question 3

Nondiscrimination and eligibilty requirements

Answer 3

• qualified plan must cover broad group of employees
• two types of requirements must be satisfied: age and service, and coverage

Question 4

Age and service requirements

Answer 4

• max age and service for employee to participate in a qualified plan are 21 y/o and one year of service (21 and 1 rule)
• special provision allows up to a 2 year service requirement but then employee is immediately vested (2year/100% rule) election not available with most 401k plans
• employee who meets age and service requirement must be allowed to participate no later than the earlier of 1. first day of plan year beginning after date the employee met requirement or 2. date 6 moths after conditions met

Question 5

Year of service

Answer 5

• employee who works 1,000 hours during initial 12 month period after being employed will earn a year of service
• employees working 500 hours for at least 3 years will be eligible

Question 6

Coverage requirements

Answer 6

regulation for qualified plans
1. ratio percentage test
- plan must cover a percentage of non-highly compensated employees (NHCE) that is at least 70% of the HCE covered. if test fails then next must pass
amount can be excluded = 100% - (% HCE * 70%)
2. average benefit test
- benefits for all NHCEs must be at least 70% of those for HCE

Question 7

Minimum participation (DB only)

Answer 7

• in addition to coverage requirements
• plan must benefit at least the lesser of
  1. 50 employees
  2. greater of
• 40% all employees
• 2 employees (or 1 if there is only one)

Question 8

Highly compensated employees

Answer 8

• relates to plan discrimination (ADP/ACP tests)
• employees are considered HCE if they are either a greater than 5% owner or an employee earning more than $150k in the preceding year

Question 9

Key employees

Answer 9

• relates to plan vesting
• employees considered key employees if during year have been any of
  1. greater than 5% owner
  2. officer and has compensation greater than 215k
  3. greater than 1% owner and compensation greater than 150k

Question 10

Top heavy plans

Answer 10

• if more than 60% of aggregate accrued benefits or account balances are allocated to key employees
• 330k salary cap
  % = Salary of key employee(s) / (salary of key employee(s) + total salary of others)

Question 11

Vesting schedules - based on date of hire

Answer 11

Faster
- applies to top heavy DB plans and all DC plans
- vesting alternatives: 3 year cliff, 2 to 6 year graded, 100% vested with 2 year eligibility

Slower
- applies to non-top heavy DB plans
- vesting alternatives: 5 year cliff, 3 to 7 year graded, or 100% vested with 2 year eligibility

Question 12

Family attribution rules

Answer 12

• attribution rules can affect who is a key or HCE (for >5% ownership rule)
• individual may be deemed to be a >5% owner because of the relationship to an actual related 5% owner
• employees who are spouse, parent, child, grandparent of individual who is >5% owner are also deemed >5% owner
• only parent deemed to own stock on behalf of children under 21

Question 13

ADP / ACP testing

Answer 13

• both compare the % of HCE to NHCE
• both tests, HCE rate must be
  1. not more than 125% of NCHE (ADP is 8%>) or
  2. not more than 200% of NHCE rate and not more than 2% greater than NHCE rate (ADP is between 1% and 8%)

Actual deferral percentage (ADP)
- elective deferrals subject to nondiscrimination test
Actual contribution percentage (ACP)
- employer matching and profit sharing contributions subject to nondiscrimination testing

• 0-2% is “times 2” and 2-8% is “plus 2”

Question 14

Catch up deferral

Answer 14

• ADP/ACP testing
• catch up deferral amounts for individuals who have reached 50 by the end of the current calendar year
• deferral increased by lesser of $7,500 or amount of participants compensation reduced by any other elective deferral

Question 15

Tax relief of 2001

Answer 15

• elective deferrals under a 401k plan are not taken into account for purposes of employers deduction limit
• elective deferrals not taxable to participant

Question 16

Controlled group

Answer 16

• common control must be taken into account in identifying the employer for purposes of contribution maximums and nondiscrimination testing
• common control rules
  1. parent-subsidiary: one entity (parent company) owns at least 80% of one or more of the other entities
  2. brother-sister: 5 or fewer owners of 2 or more entities own 80% or more of each entity
  3. affiliated service group: apply primarily to service organizations to HALE
  4. employee leasing: provisions to reduce discrimination potential from an employers choosing to lease employees from independent leasing organization instead of directly

Question 17

Importance of identifying a controlled group

Answer 17

• annual additions to qualified plan are limited to 100% of comp or $66k
• individual with multiple accounts applies limit as
  1. in the aggregate to all accounts when the plans are offered by a single employer or two or more related employers
  2. separately to each account in unrelated employer plans

Question 18

Integration with Social Security/ disparity limits

Answer 18

• purpose of integration is to equalize the employers contributions to retirement plans for higher and lower paid employees
• without integration the employer contributes a higher percent of compensation for lower paid employees
• result is to lower the cost for low rank employees while maintaining same cost for highly paid

Question 19

Defined benefit plan integration

Answer 19

• two methods for integrating DB formula with SSA
  1. Excess method
• integration level: level of compensation above which the excess contribution is made. integration level may not exceed SS taxable wage base
• base benefit percentage: plan benefit for compensation below the integration level
• excess benefit percentage: plan benefit for compensation above integration level
• permitted disparity is lesser of base benefit or 26.25%
• excess % = base % + permitted disparty (lesser of base or 26.25%)
  2. Offset method

Question 20

Defined contribution plan integration

Answer 20

• integration level: any dollar amount up to SS wage base 160,200
• base contribution percentage: contribution percentage for comp below integration level
• excess contribution percentage: contribution percentage for comp above integration level
• permitted disparity - lesser of base contribution percentage or 5.7% formula determining components of integrated DC plan

Question 21

Social security integration problem

Answer 21

step 1: calculate contribution for amount below SSA threshold (160,200)
amt = 160,200 * base percentage
step 2: calculate contribution in excess of SSA wage base (160,200)
amt = (330k or wage - 160,200) * excess percentage
step 3: add 1 and 2 together (cant be over 66k)