Retirement Planning _ Introduction to Qualified Plans

Question 1

What are the types of Pension Plans and Profit Sharing Plans?

Answer 1

Question 2

What are the differences between defined benefit and defined contribution plans?

Answer 2

Question 3

What are the characteristics of DB and DC plans?

Answer 3

Question 4

What types of employee elective deferrals are not subject to the payroll tax exclusion?

Answer 4

Retirement plans such as 401K, 403B, SIMPLEs, SAPSEPs, and 457 plans.

Question 5

What are advantages of qualified plans?

Answer 5

Question 6

What are qualified plan Coverage Test general rules and requirements?

Answer 6

Plan must coverage at least 70% of non-highly compensated EEs

Plan must meet at least one of the three following tests:
1. General safe harbor test
2. Ratio percentage test
3. Average benefits test

DB plans must ALSO pass an additional coverage test (50/40 test)

Question 7

Who is considered to be a highly compensated employee (HCE)?

Answer 7

More than 5% owner at any time during the plan year or preceding plan year,

EE with compensation > $150,000 (2023) for the current plan year, OR

EE with compensation > $135,000 (2023) for the prior plan year

Question 8

What are the formulas for the 3 qualified plan tests?

Answer 8

Question 9

What is the Defined Benefit 50/40 Test?

Answer 9

DB plans must meet the 50/40 test

Requires the DB plan to benefit the LESSER OF 50 nonexcludable (eligible) EEs or 40% of all non excludable (eligible) EEs on each day of the plan year

** REMEMBER IT’S 50 EEs or 40%
“PEOPLE COME FIRST”

Question 10

What are the DC Plan Vesting Schedules?

Answer 10

Remember the 2-year vesting schedule applies to ER contributions under a 401K plan that makes use of an Automatic Enrollment Feature.

Deferred eligibility is NOT AVAILABLE for 401K plans.

Question 11

What are the DB Plan Vesting Schedules?

Answer 11

ALL ER CONTRIBUTIONS
* 3-7 year graduated cliff
* 5-year cliff

TOP HEAVY PLANS
* 2-to-6-year graduated cliff
* 3-year cliff

CASH BALANCE
* 3-year cliff

Question 12

Who is considered a “Key Employee”?

Answer 12

Any EE who is any one or more of the following:

• a GREATER THAN 5% owner
• a GREATER THAN 1% owner w/ compensation > $150,000
• an officer w/ compensation > $215,000 (2023)

** Notice a key EE must be an owner or an officer. Compensation by itself will not make an EE a key EE.

Question 13

When is a DB plan considered top-heavy?

Answer 13

Under EITHER of the following two definitions:

1. when the PV of the TOTAL ACCRUED BENEFITS of KEY EEs EXCEEDS 60% of the PV of the total accrued benefits for all EEs
2. when the AGGREGATE of the ACCOUNT BALANCES of KEY EEs EXCEEDS 60% of the aggregate accounts of all EEs

** If 60% of the benefits or contribution are going to key EEs = TOP-HEAVY

Question 14

What must a plan do once it is determined to be top-heavy?

Answer 14

1. Use top-heavy vesting schedules
   (2-to-6-year or 3-year cliff)
   ** all qualified DC plans meet this by default
2. Provide a minimum level of funding to non-key EEs
   ** DC = 3% contribution or equal to % for key EEs
   ** DB = 2% contribution per EE’s years of service X average EE annual compensation over the testing period

Question 15

What contribution and deferral tests must all qualified plans including a Cash or Deferred Arrangement (CODA) pass?

Answer 15

Actual Contribution Percentage (ACP) test for ER matching contributions and EE after-tax contributions

Actual Deferral Percentage (ADP) test for EE elective deferrals

Question 16

What is the ER’s required statutory limit for annual expected retirement benefits for a DB plan?

Answer 16

Equal to the lesser of:

$265,000 (2023) OR

100% of the average of the EE’s three highest consecutive years compensation during the time of plan participation

Question 17

What is the annual maximum contribution limit for a DC plan?

Answer 17

100% of EE’s compensation for the plan year, OR

$66,000 (2023) not including the catch-up contribution

Maximum contribution is known as the 415c limit:
= ER contributions + EE contributions + forfeitures

Question 18

What are controlled groups and how is a controlling interest determined?

Answer 18

Controlled group relationship exists if one of the following business relationships exist:

Parent-subsidiary = 80% of stock of each corporation except the common parent is owned by one or more corporations in the group . Parent corporation owns 80% of at least one other corporation.

Brother-Sister = group of 2+ corporations in which five or fewer common owners own directly or indirectly a controlling interest of each ground have “effective control” = more than 50% of each corporation’s stock but only to the extent such stock ownership is identical to such corporation

Combined Group = consists of 3+ organizations that are organized as follows:
- Each org is a member of either a parent-subsidiary or brother-sister group
- At least one corp is the common parent of a parent-subsidiary and is also a member of a brother-sister group