Qualified Plans Requirements

Question 1

What is the purpose of Employee Retirement Income Security Act (ERISA)?

Answer 1

To protect the retirement interest of plan participants. ERISA requires that plan sponsors report on multiple aspects which in-turn protects plan participants from abuse.

Question 2

What are the four sections of ERISA? (Way To Replace Pay)

Answer 2

W - workers rights Title I
T - tax code Title II
R - retirement participants Title III
P - PBGC Title IV

Question 3

What does the DOL do for retirement?

Answer 3

They are regulators. They have oversight of the retirement plan fiduciaries and ensure retirement plan reporting and disclosure compliance.

Question 4

What does the Pension Benefit Guarantee Corporation (PBGC) do?

Answer 4

They insure vested plan participants against loss of benefits from plan termination. PBGC is only for defined BENEFIT plans. ERs of 25 or less are not required to have PBGC. PBGC payments are limited based on the age someone retires

Question 5

What are the three categories of qualified retirement plans?

Answer 5

Defined benefit (DB)
Defined contribution (DC)
Defined contribution profit sharing (PS)

Question 6

What are the three general categories of retirement plans?

Answer 6

Qualified - meets section 401(a) requirements
Tax-advantaged - example 403(b)
Non-qualified

Question 7

What is the difference between a profit sharing and a pension plan?

Answer 7

Profit sharing means that contributions are not mandatory
Pension plan means that contributions are mandatory

Question 8

What makes a qualified plan, qualified?

Answer 8

The ER gets to immediately deduct all contributions to the plan if the plan meets all four major requirements

a. The plan document provides the terms and benefit amounts provided by the plan.
b. Once adopted, the plan is recognized as a separate legal entity (must be in writing).
c. The trust holds the plan assets. The trustee is usually selected by the employer.
d. The funds, once contributed, become the plan funds and, except in unusual circumstances, cannot be returned to the employer.

Question 9

What makes a non-qualified plan, non-qualified?

Answer 9

A NQ deferred compensation (NQDC) plan is more flexible in that it allows for discrimination to provide benefits to highly compensated EEs. There are no contribution limits and they do not have the ERISA reporting requirements. However, there can be no constructive receipt - in essence, this is merely a promise that the ER will compensate the EE.

Question 10

What is the 21 and 1 rule for qualifying plan eligibility?

Answer 10

To be a qualified plan, the participant, who is at least 21 and have 1 year of eligible service (1000 hours), must be able to enter the plan within 6 months.

Question 11

What is the IRS-required percentage of participants to be a qualified plan and how is it calculated? (The percentage test)

Answer 11

70% of non-HCEs must be eligible (not necessarily active) in the company plan

Question 12

What is the ratio test to determine if a plan is qualified?

Answer 12

% non-HCE / % HCE = ratio test (<70% required)

Question 13

What is the average benefits test to determine a qualified plan?

Answer 13

Non-HCE benefits / HCE benefits = average benefits ratio (<70% required)

Question 14

What is the 50/40 test?

Answer 14

Only applicable to DB plans. In addition to the eligibility ratio, the 50/40 test must pass. That is, the defined pension plan must benefit THE LESSER of 50 people of 40% of all eligible employees

“People before percentage”

Question 15

What are control group rules?

Answer 15

They prevent an owner of multiple, similar businesses from discriminating non-HCEs in one business because they technically meet the IRS rules for a qualified plan in the other business. For IRS purposes, the multiple businesses are treated as one.

Question 16

What is vesting?

Answer 16

It is the time at which an EE becomes eligible for their benefit plan.

Question 17

What is top heavy vesting rules for DC and DB plans?

Answer 17

For defined benefits (DB), the ER must:
-provide accelerated three-year cliff or two-to-six-year graded vesting.
-provide a minimum defined benefit accrual of 2% times the number of years of service (up to ten years) for all non-key employees.

For defined comp (DC), the ER must:
-make a minimum contribution of at least 3% of annual compensation to each non-key EE’s account. If the contribution for key EEs is less than 3%, the contribution for non-key EEs can be equal to the contribution for key EEs.

Question 18

What is a key EE (for the purpose of top-heavy rules)?

Answer 18

(one of)
Salaried greater than $200k (2022)
Greater than 5% ownership
Greater than 1% ownership & compensation of $150k

No more than 50 EEs (or top 10%) will be treated as officers

Question 19

What defines a “top-heavy” DB plan?

Answer 19

If more than 60% of the aggregate benefit goes to key EEs

Question 20

What is “includible compensation”?

Answer 20

The amount of compensation that can be included as contributions to a qualified DB plan. This is found on the tax tables

Question 21

DB pension plans are defined by their post-retirement benefit payments. What are those limits?

Answer 21

The lesser of
100% of the average, highest three consecutive years of compensation
or
$245,000 (2022) found in the tax tables

Question 22

DB contribution plans are defined by their contribution limits, AKA the annual additions limits. What are the annual additions limits?

Answer 22

In 2022, it can’t exceed the lesser of:

100% of annual compensation
or
$61K of which, only $20.5K can be contributed by the EE

**Exception - catch-up contributions over 50

Question 23

What is the excess percentage calculation for SS security integration above the wage base?

Answer 23

=base contribution percentage + permitted disparity

Question 24

What is the max disparity for DB plans?

Answer 24

= 3/4 of 1% x years of service up to 35 years. A max of 26.25%

Question 25

What is the max excess percentage for DC plans?

Answer 25

Lesser of:
2 x base %
OR
Base % + 5.7%

Question 26

What is an advance determination letter, prototype plan, and master plan?

Answer 26

ADL is pre-approval from the IRS that a small business retirement plan is legit
Prototype plan is a templated plan, but uses multiple funding sources
Master plan is a templated plan, but only uses one funding source

Question 27

When must an ER establish a qualified plan?

Answer 27

NLT than the business tax return due-date including extensions

Question 28

What is a summary plan description (SPD)?

Answer 28

An ERISA reporting requirement - must give a participant an SPD within 120 days of eligibility to explain the benefits and how the plan works.

Question 29

What is the annual report (form 5500)?

Answer 29

It is the annual summary of a DB plan that must be filed with the IRS

Question 30

What is the Summary Annual Report (SAR)?

Answer 30

It summarizes the information found in the Form 5500 and is provided to plan participants.

Question 31

What is the individual accrued benefits statement?

Answer 31

A report that must be issued quarterly to plan participants summarizing their accounts performance for the quarter

Question 32

What is the summary of material modification (SMM) report?

Answer 32

A report that summarizes any substantive changes, such as vesting, over the past year.

Question 33

What is the penalty for a qualified plan prohibited transaction?

Answer 33

15% of the amount involved in each transaction from the date of transaction to the date corrected.

Question 34

What is the HCE definition?

Answer 34

More than 5% owner and compensated with $135k last year (2022)

Top 20% of the company

Question 35

What happens to the contributions limits if an EE changes jobs mid year to an unrelated career?

Answer 35

The contribution limit of $61k applies to job A and again for job B (total $122K)

The contribution limit for the EE remains capped for the year at $20.5k (2022)

Question 36

What is deduction limit of an ER contribution made on behalf of an EE?

Answer 36

Generally subject to a limit of 25% of includible employee compensation. The limit on the deduction is determined with reference to the aggregate includible compensation of the company. Thus, it is possible that the employer contribution, on behalf of one employee, can exceed 25% of the worker’s compensation as long as it is balanced out by another employee’s percentage contribution so as not to exceed the overall 25%-of-includible-compensation employer deduction limit for contributions to a defined contribution plan.

Question 37

When is a plan 100% vested immediately?

Answer 37

When a plan is terminated

For any EE contributions

Question 38

What do non key EEs get in a top heavy DB plan?

Answer 38

2% for the first 10 years

Question 39

What do non key EEs get in a top heavy DC plan (C = Cliff)

Answer 39

3 year cliff or 2-6 graded vesting + 3% match

Question 40

What does the ER election to “top 20%” mean to key EE in both ownership and compensation?

Answer 40

In ownership, nothing. If the EE is more than 5% owner, they are a key EE.

In compensation, the EE must be in the top 20%, but if they pass the ownership test, the comp test doesn’t matter.

Question 41

What are the top 20% election rules?

Answer 41

EE must be compensated more than $135k and be in the top 20% of compensated EEs

Question 42

True/False: The permitted disparity level in a defined benefit plan must be reduced for early retirement

Answer 42

True

Question 43

In a defined contribution plan, if the integration level is less than the Social Security taxable wage base, which of the following, occurs?

1) Larger contributions will be made on behalf of employees whose compensation is above the lower integration level.
2) The plan’s cost to the employer increases as the integration level is reduced.
3) The permitted disparity between the maximum excess contribution percentage and the base contribution percentage is reduced.
4) Employer contributions must be adjusted to an integration level of $147,000 (2022) to achieve optimum integration.

Answer 43

1) Larger contributions will be made on behalf of employees whose compensation is above the lower integration level.
2) The plan’s cost to the employer increases as the integration level is reduced.
3) The permitted disparity between the maximum excess contribution percentage and the base contribution percentage is reduced.