Qualified Plans Flashcards by John Abel

What are the 4 types of pension plans?

Hint: there are two each of two different types.

Defined Benefit Plans

Defined Benefit Plans
Cash Balance Plans

Defined Contribution Plans

Money Purchase Plans
Target Benefit Plans

How well did you know this?

Not at all

Perfectly

What are the 7 types of profit sharing plans?

Profit sharing plans
Stock bonus plans
Employee stock ownership plans (ESOPs)
401(k)
Thrift Plans
New comparability plans
Age-based profit sharing plans.

How well did you know this?

Not at all

Perfectly

Is a 403(b) a qualified plan?

No.

How well did you know this?

Not at all

Perfectly

What are the legal premises of pension and profit sharing plans?

Pension plans pay a benefit for life.

- Profit sharing plans are based on deferral of compensation

How well did you know this?

Not at all

Perfectly

Do pension and profit sharing plans allow in-service withdrawals?

Pension plans generally don’t, but defined benefit plans do after age 59.5.

Profit sharing plans do after 2 years (if plan allows).

How well did you know this?

Not at all

Perfectly

Are pension plans and profit sharing plans subjected to mandatory funding rules?

Pension plans - yes.

Profit sharing plans - no.

How well did you know this?

Not at all

Perfectly

What % of the plan can be invested in employer securities?

Pension plan - 10%

Profit sharing plan - up to 100%

How well did you know this?

Not at all

Perfectly

Must the plan provide joint and survivor annuities?

Pension - yes

Profit sharing - no.

How well did you know this?

Not at all

Perfectly

Can pension plans be either defined benefit or defined contribution?

Can profit sharing plans?

Yes

How well did you know this?

Not at all

Perfectly

What are the contribution limits for defined benefit and defined contribution plans?

Who assumes the risk?

Are accounts co-mingled or separate?

DC Plans:

contribution limit = 25% of covered comp.
Employee assumes risk.
Accounts are individual and separate.

DB Plans

contribution limit = Not less than the unfunded current liability.
ER assumes risk.
Accounts are co-mingled.

How well did you know this?

Not at all

Perfectly

How are forfeitures allocated between DB and DC plans?

Can you be given credit for prior service?

Are the plans subject to PBGC coverage?

DB plans:

Forfeitures are used to reduce plan costs.
You can get credit for prior service
Covered by PBGC

DC plans:

Forfeitures can be used to pay costs or given to employees.
No credit for prior service
No PBGC coverage

How well did you know this?

Not at all

Perfectly

What are the advantages of qualified plans?

For the ER:

No payroll tax on contribution.
Tax deduction for for contribution.

For the EE:

Pre-tax contribution opportunity.
Tax deferred earnings
ERISA protection.

How well did you know this?

Not at all

Perfectly

What are the ER trade-offs for the tax advantages of QP’s?

They agree to vesting, funding, eligibility, and non-discrimination compliance guidelines by the IRS.

How well did you know this?

Not at all

Perfectly

What are employee payroll taxes?

What are employer payroll taxes?

What is the tax break for qualified plan contributions?

6.2% OASDI on income up to $142,800 for 2021.
1.45% Medicare on all income.
Additional .9% Medicare tax on incomes over 200k single, 250k MFJ

ER’s are required to match the first two, but not for contributions to qualified plans up to 25% of covered comp for both ER’s and EE’s so 15.3% tax savings

How well did you know this?

Not at all

Perfectly

When are qualified plan assets NOT protected from creditors?

Divorce, child support (QDRO)
Federal tax levy
Crime related to plan.

How well did you know this?

Not at all

Perfectly

How are the protections of qualified plans from the protections of IRA’s?

Note: IRA types include traditional, Roth, SEP and SIMPLE.

Qualified plans are protected under ERISA.

A 2005 bankruptcy protection act covers IRAs.

What are the disadvantages of QP’s?

Limited investment options.
No or limited access to money while working.
Distributions taxed as OI
Early withdrawal penalties.
Mandatory distributions at 72.
No step-up basis at death.
Income and estate taxes at death

What are the 4 requirements for qualified plans?

Eligibility, coverage, vesting, plan funding limits.

What is the standard eligibility requirement for QP’s?

Age 21 + 1,000 hrs in 12 mos.

Beginning in 2021, how do LT part-time employees become eligible?

500+ hrs/yr for 3 consecutive years.

Yrs begin in 2021, earliest eligibility in 2024.

What are QP plan entrance date requirements?

No employee has to wait more than 6 months past the time they become eligible to enter the plan.

Therefore, most plans have 2 entrance dates/yr.

What is the 2-year exception for plan entrance dates?

Are 401k’s eligible for it?

A plan may require an employee to wait 2 years to become eligible, but if they do this, they must be 100% vested when they enroll.

401k’s cannot do this.

What are the 3 coverage tests for a qualified plan?

the general safe harbor test, ≥ 70% of eligible NHCs are covered.
The ratio % test (or the people test) % of NHC covered ÷ % HC covered ≥ 70%
Average benefit % test
- AB% NHC ÷ AB% HC ≥ 70%.
- Nondiscriminatory test.

Who are HC employees?

> 5% owner (including family attribution), current year OR PREVIOUS YEAR.
Earns more than $130,000

What is the special election employers can make about how to define HC’s? What about > 5% owners in the special election?

They can stipulate that anyone who is over the income limit and in top 20% of compensated employees is HC. > 5% owners are always HC.

What is the additional test that DEFINED BENEFIT plans must pass to be qualified?

The 50-40 test. They must cover the lesser of 50 people or 40% of their employees.

What is vesting? What are always 100% vested?

Vesting is the transfer of ownership of plan assets from employer to employee. EE contributions and their earnings are always 100% vested.

What are the 2 DC plan vesting schedules? What if the 2-year election is used?

For DC plans, the 2 vesting schedules are 2-6 year graduated, and 3-year cliff. Under 2-6 year graduated, employee gains 20% ownership every year from years 2-6. Under 3-year cliff, EE is 100% vested after 3 years, not vested at all before. EE’s are always 100% vested if 2-year election is used.

What are the vesting schedules for DB plans? What if the plan is top-heavy? What about Cash Balance plans?

DB plans use either 3-7 year graduated or 5-year cliff. Top heavy plans must use 2-6 year graduated or 3-year cliff. Cash Balance plans must use 3-year cliff.

Can a plan vest faster than the vesting schedules allow?

Yes, as long as the employee is more vested than BOTH vesting schedules at every year.

When do ‘years of service’ begin for vesting purposes? What years don’t count?

Years of service begin when EE is hired, NOT when they become eligible. You don’t have to count yrs b4 ER had a plan, or years when EE was under 18 and did not contribute, or years when he didn’t contribute to employee contributory plan.

What is a key employee? What is the term ‘key employee’ used for?

A key employee is - >5% owner - > 1% owner with salary in excess of 150k - An office with compensation in excess of 185k A key employee is used to determine if a plan is top-heavy.

What makes a plan top heavy?

For DB, > 60% of accrued benefits are for key employees. For DC, > 60% of acct. balances are for key employees.

What must a top-heavy plan do?

If DB, use 2-6, and 3-cliff vesting + provide benefit to non-keys of .02 x years of service x compensation over testing period. If DC, a contribution = to the lesser of 3% compensation or that of key employees.

What is the maximum benefit of the DB plan for one year?

Lesser of: 230K or average of 3 highest salary years (within covered comp limit).

What is the maximum PER PARTICIPANT contribution to a DC plan?

Lesser of: 100% of their wages or 58k (+ 6,500 catch-up for 50+).

What is the maximum ER contribution to a DB plan?

25% of total comp. 25% of covered comp. is the max they can deduct.

What are Controlled Groups? What is the ownership % that determines a controlled group?

Businesses that are lumped together for qualified plan rules: - Parent and subsidiary companies (80% ownership) - Brother-sister companies (5 or fewer people own 80% of stock in two companies). - Combined group (3 or more companies in multiple parent/subsidiary, brother/sister relationships).