Retirement Flashcards
what is the pension benefit guaranty corporation?
created under ERISA and responsible for insuring plan participants against loss of benefits from plan termination
financed by premiums paid by sponsors of defined benefit plans
insures only defined benefit plans (traditional and cash balance), not defined contribution plans (insures up to $67,284/yr in 2019
employers with 25 or fewer active participants are exempt from PBGC requirements
when can the pension benefit guaranty corporation terminate a defined benefit plan?
minimum funding standards not met
benefits cannot be paid when due
long-run liability of company to PBGC expected to increase unreasonably
what is the difference between a pension plan and profit sharing plan (defined contribution)?
pension plan contributions are mandatory, profit sharing is discretionary
what is a main characteristics of nonqualified plans?
do not have to meet nondiscrimination requirements of qualified plans and benefits can exceed typical qualified limits
not subject to ERISA requirements
funding not required/informal funding possible
provide deferred employer deductions and do not allow an income tax deduction until the employee recognizes the income on his tax return.
entitle the employer to an immediate income tax deduction only if the employee is currently taxed on the benefit.
entitle the employee to defer taxes on the benefit only if the employer’s income tax deduction is deferred.
what are the eligibility requirements for qualified plans?
21 yrs old, one yr of service (1000 hours within a 12mo. period)
The exception to the 21-and-one rule is the 2-year/100% rule (not 3 years) that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant.
must be permitted to enter within 6 mo. of eligibility
important because this is when employer begins to make contributions on behalf of participant
define a highly compensated employee
meets one of following criteria:
- greater than 5% owner of employer during current or preceding year
- had compensation above $125k for preceding year from employer
what are qualified plan coverage requirements?
employer-sponsor of plan must cover at least 70% of nonhighly compensated employees (safe harbor percentage test)
covered employee means they’re eligible to defer part of their compensation
plans not meeting safe harbor percentage test must pass:
ratio test - (avg benefits % non HCEs / avg benefits % HCEs) >= 70%
OR
average benefits percentage test - (avg benefits % non HCE / avg benefits % HCE) >= 70%
what is the 50/40 test?
defined benefit pension plans must meet (in addition to coverage tests)
all defined benefit pension plans must benefit no fewer than the lesser of: 50 employees or 40% of all eligible employees
what is employee compensation capped at for covered compensation?
$280,000
what is the annual additions limit for defined benefit pension plans?
cannot exceed lesser of:
100% of participants compensation averaged over 3 highest consecutive years of compensation
OR
$220k/yr
what is the annual additions limit for defined contribution plans?
cannot exceed lesser of:
100% of participant’s annual compensation
$56k annually
additions include employee and employer contributions, forfeitures allocated to defined contribution plan on behalf of employee
per source of income (employer), but total contribution by participant aggregated between all plans (except Section 457)
what is a noncontributory plan?
employer pays all - most pension and profit-sharing plans
what is the limit on employer contributions made of behalf of an employee and the employer tax deductions taken for these contributions?
100% covered compensation
25% covered comp
define a top-heavy defined benefit plan
provides more than 60% of aggregate benefits to key employees
- must provide accelerated 3 yr cliff or 2 to 6 yr graded vesting
- key employee = 5%+ owner
- SIMPLE IRA and 401k are exempt from top heavy requirements
- must provide minimum benefit accrual of 2% x # yrs of service up to 20% for all non-key employees
- must make minimum contribution of 3% annual compensation (or equal contribution for all employees)
what is the permitted disparity limit for integration of defined contribution plans?
lesser of
2x base percentage
OR
based percentage + 5.7%
what plans are prohibited from social security integration?
ESOP, SARSEP, SIMPLE, 401(k), employer matching contributions
under the pension protection act, an eligible investment advice arrangement exists where either:
investment adviser’s fees are neutral
unbiased computer model certified by independent expert to create recommended portfolio is used
what is the penalty for prohibited qualified plan transactions?
15% amount involved if corrected
if not corrected, 100% amount involved, included personal liability of party in interest
DOL regulates actions of plan fiduciaries and ensures compliance with ERISA plan reporting and disclosure requirements
what vesting schedules must a defined contribution plan provide?
3 yr cliff
two to six yr graded
what is the purpose of ERISA
federal law established to enforce equitable standards, deter retirement plan abuse, and set legal guidelines for most private retirement, health, and welfare benefit plans
reports defined benefit plan info to PBGC, participants, IRS, and DOL
what is considered in complying with max annual additions limit?
employee after-tax contributions
employer qualified non-elective contributions
employer qualified matching contributions
what is an advance determination letter?
received from IRS by companies with qualified plans to avoid risk of disallowed deductions, ensures plan is qualified according to IRS regulations
which organizations can provide pension plan services?
trust companies commercial banks investment firms asset management groups insurance companies
define leased employee rules
aggregation rules that pertain to the leasing of individuals on a long-term, full-time basis and treating such individuals as employees for purposes of the coverage requirements.
define affiliated service group rules
aggregation rules that address situations in which related businesses work together to provide goods and services to the public.
when can qualified plans impose a 2 yr waiting period?
if employer contributions are 100% vested immediately upon entering
the employer’s promise to pay the employee at some predetermined point in the future is characteristic of what type of plan?
nonqualified
what is the section 415 limit on the projected annual benefit the plan can provide to the employee-participant at age 65
lesser of
$220,000 of annual compensation
OR
100% of participant’s compensation averaged over participant’s highest 3 consecutive years of earnings
what are the 3 methods to calculate participant’s promised benefit in defined benefit plan?
flat amount
flat percentage
unit benefit
what is a DB(k) plan?
hybrid plan designed to address shortfalls in 401(k) and decline in establishment of defined benefit pension plans
employer with no more than 500 may offer
must include auto enrollment feature
fully vested 50% match on first 4% of compensation deferred by employee
what is a cash balance pension plan?
defined benefit pension plan where investment decisions are made by plan fiduciary and credits a guaranteed return (interest rate credit), cost savings from traditional pension plan
subject to minimum funding requirements and guaranteed by PBGC
3 year cliff vesting requirement
most appropriate with younger, middle income workforce who’s concerned with retirement income security and has enough participants to spread admin costs across
what is a fully insured pension plan (section 412 plan)?
funded exclusively by cash value life insurance or annuity contracts
guarantees payment of death benefit to plan beneficiaries
exempt from minimum funding standards, unless there is an outstanding loan against insurance policy
typically with newly, designed plan, but less common now with limited growth
best for employer with stable cash flow
how are forfeitures treated with defined contribution plan?
offset plan expenses or future employer contributions
count against remaining participants’ annual addition limits
reallocated amount remaining plan participants increasing potential individual account balances
what are the 4 important pension plans?
Be My Cash Target traditional defined Benefit (older) Money purchase plan (younger) - DC Cash balance plan (younger) Target benefit plan (older) - DC
what are the main principles of a target benefit plan?
employee benefit not guaranteed by employer (employee bears investment risk)
separate employee accounts, projected retirement benefit
plan requires actuarial assumptions upfront, but no ongoing
max deductible employer contribution is 25% of covered payroll and are mandatory
participant’s max addition is lesser of 100% compensation or $56k
how are target benefit and money purchase pension plans similar?
PBGC insurance not required actually dollar benefit not guaranteed employee bears investment risk lower contributions for younger and lower-paid employees each employee has individual account
what are main characteristics of a money purchase plan?
plan sponsor’s costs are predictable and plan is easily administered
participant can easily understand simple design and contributions are based on salary for each year of career, rather than salary at retirement
mandatory funding requirement
no actuary or PBGC insurance required
no held to ADP testing (only applies to 401k
additions to participant accounts are limited to lesser of 100% compensation or $56k
deductible employer contribution of up to 25% aggregate covered compensation
employer securities held by plan cannot exceed 10% of FMV of plan assets
to remain qualified, what contribution requirement must be made?
substantial and recurring - contribution must be made in 3 of every 5 yrs
limited to lesser of 100% employee compensation or $56k
what tests must be met to qualify for hardship withdrawal of profit sharing plan in-service distribution?
financial needs test
resources test
unreimbursed medical expenses or funeral costs, primary residence purchase, higher ed expenses for immediate family, payment to prevent foreclosure on primary residence
distribution is taxable and 10% penalty applies (if below age 59.5)
amount withdrawn before retirement/termination of employment cannot exceed participant’s vested account balance
***pension plans do not generally permit in-service withdrawals before age 62
what are the two requirements by which the new comparability plan will satisfy nondiscrimination rules?
eligible non-HCEs must receive allocation of at least 5% of compensation
if less than 5%, minimum allocation rate is 1/3 of highest allocation rate under plan
what tests must a 401k plan satisfy in addition to general nondiscrimination tests (avg benefits %, ratio, percentage coverage)?
actual deferral percentage ADP for non-HCE: less than 2%, max ADP for HCE is 2x 2-8%, max HCE is 2% above 8%, max HCE is 1.25x - if test fails, employer either makes corrective distribution or additional qualified matching to non-HCEs actual contribution percentage same rules as ADP test above, just applicable when employer matching and employee after-tax contributions present
what is the safe harbor 401k plan?
permit high level of elective deferrals by employees without discrimination testing
max waiting period for eligibility of 1 year
not subject to top-heavy plan provisions or meet the ACP and ADP tests
mandatory minimum employer contribution required, immediately 100% vested
2 contribution methods:
1. nonelective contribution of 3% of compensation for all eligible employees
2. employer matching contribution of 100% on first 3% for non-HCE compensation, 50% match on next 2% of non-HCE compensation for those actually deferring salary into plan
what are main characteristics of SIMPLE 401k?
used by employers w/ 100 or fewer employees earning $5k+ during preceding year
employer may not maintain any other qualified or sponsored plan (except 457 plan)
exempt from nondiscrimination testing (ADP test and top-heavy rules)
max employee deferral is $13,000 w/ $3k catch-up after 50 (so total could be $13k + employer match)
employer-sponsor may match elective deferrals up to 3% of compensation or make a flat 2% contribution for all employees, regardless of whether elective deferrals are made
employee is always 100% vested in contributions made by employer
what are the 2 tests that must be met for the distribution of earnings from a roth 401k to be tax free?
distribution must be made after 5 yr period from date of first regular contribution to plan
distribution is made after date on which participant has attained age 59.5 or becomes disabled, or is made to beneficiary of deceased participant
what are the 2 main differences between Keogh plan and other tax-advantaged plans?
individuals must calculate retirement plan contribution based on earned income, or net earnings from self-employment, rather than W-2 income
individuals must use a net contribution rate in determining their allowable contribution to a Keogh defined contribution plan (plan contribution percentage / 1 + contribution percentage)
what are top-hat plans?
nonqualified plans that supplement qualified plans, may defer taxes for participants, and a generally discriminatory in favor of highly compensated employees
what type of contributions do thrift plan arrangements require by employees?
after-tax
A qualified automatic contribution arrangement (QACA) will automatically satisfy Section 401(k) nondiscrimination testing if it:
- Provides for an automatic deferral percentage (ADP) of between 3% and 10% of employee compensation.
- Provides an employer contribution to non-HCEs of either an employer match of 100% of the first 1% deferred plus 50% of the next 5% or a 3% non-elective profit-sharing contribution in lieu of the matching contribution.
- Provides that employer contributions become 100% vested after the employee has completed no more than 2 years of service.
- Requires that, within 30 days before the start of the plan year, participants receive written notice of their right to opt out.
what are main characteristics of stock bonus plans?
defined contribution
not required to have contributions based on profits
allow portion of stock appreciation to be deferred until stock is sold and lump sum distribution taken
provides employer a deduction for contributions
costly and administratively cumbersome
create market for employer stock
income tax owed on value of stock distributed to plan participants
what is the exception to the compensation limit of $280k?
SIMPLE IRA limit of $416,667 ($12,500 / 3%)
what are the main restrictions of a SIMPLE IRA?
25% withdrawal penalty if taken within first 2 yrs, then reverts to 10% penalty
may not purchase life insurance as funding vehicle
participant loans unavailable
not subject to nondiscrimination rules
max contribution of $13k w/ $3k catchup (over 50)
allowed to match only 1% in 2/5 yrs (typically 3% contribution match or 2% nonelective contribution by employer)
applicable to those who have earned $5k+ in any 2 previous years and expect to receive the same or greater in the next year
what are the major SEP plan requirements?
- must cover all employee at least 21 yrs old and have worked for employer 3 out of 5 yrs
- contributions must be made on behalf of employees over 60% or with compensation at least $600
- contributions only made by employer and contribution percentage is the same for all participants in the plan
- may exclude union employees if they already have separate plan
- contributions limited to lesser of: $56k OR 25% of employee’s compensation
eliminates admin complexity, lengthy reporting, numerous discrimination tests, and restrictive contribution formulas w/ many retirement plans
form of IRA (no investment in life insurance or loans allowed!)
very portable because funding an IRA for the employee
ALWAYS fully vested
contributions can vary year to year (i.e. NOT mandatory), just have to be uniform across all employees
benefits younger employees
EMPLOYER contributions to SEP are not subject to FICA, FUTA, or income tax withholding and are excluded from employee’s current income
20% max contribution for self-employed person
accounts can be opened and funded up to the tax return filing deadline (file form 5305-SEP)
what must be done if a SEP plan is determined top-heavy (over 60% of all contributions made to HCEs)?
employer must make minimum contribution of 3% of employee’s compensation for each non-key employee plan participant
what is the tax-sheltered annuity?
AKA 403(b) plan
typically public schools, nonprofit hospitals, church employees
must be universally available to all eligible employees
funded either by mutual funds or annuity contracts
similar limits to 401k
in-service withdrawals permitted
special catch-up provision for employees who have worked for 15+ years for qualified employer: lesser of $3,000, $15,000 reduced by amounts previously deferred under special catch-up, or $5,000 multiplied by employee’s years of service with employer less sum of all prior salary deferrals (max saved in 1 yr is $28k (19+6+3))
generally not subject to 401k special nondiscrimination testing (only ACP if employer matching contributions are present)
not eligible for NUA treatment
not subject to ERISA reporting and disclosure requirements (if sponsored by church or governmental organization)
