Retirement Planning and Employee Benefits - Lesson 1 (Introduction to Qualified Plans) Flashcards
What are the 2 types of qualified plans?
1) Defined Benefit Plans
2) Defined Contribution Plans
What are the 2 types of Defined Benefit Plans and the 2 types of Defined Contribution Plans (better known as the 4 types of pension plans)?
Defined Benefit Plans:
1) Defined Benefit Pension Plan
2) Cash Balance Pension Plan
Defined Contribution Plans:
1) Money Purchase Pension Plan
2) Target Benefit Pension Plans
What are the 7 types of Defined Contribution Profit Sharing Plans?
1) 401(k)
2) ESOP
3) Profit Sharing Plans
4) Stock Bonus Plans
5) Thrift Plans
6) New Comparability Plans
7) Aged Based Profit Sharing Plans
All defined benefit plans are __________________ .
Pension Plans
Defined contribution plans can be either _______________ or ______________________________ .
Pension Plans or Profit Sharing Plans
Qualified plans provide employers with 3 things, what are they?
1) Current Income Tax Deductions
2) Payroll Tax Savings
3) Federally Provided Creditor Asset Protection
What are the two main disadvantages of the qualified plan for an employer?
1) Cost of the plan
2) Compliance
KNOW THIS CARD
A. Payroll taxes for an employees wages are taxed subject to a ____ % (OASDI) on thier compensation up to $ ___________ for 2022 and _______ % for Medicare tax on 100% of the employees compensation.
B. The employer is required to __________ any payroll taxes paid by the employee including OASDI up to $__________ , and Medicare.
A. 6.2% up to $147,000, 1.45% on Medicare
B. Match up to $147,000
*Employers and employees are exempt from payroll taxes on employer contributions to a ____________________ .
Qualified Retirement Plan
*An individual is liable for an additional medicare tax of ___ % on wages, compensation, or self employment income if it exceeds ____________ MFJ, _____________ MFS, ____________ Single, ____________ HOH, _______________ QHDC.
.9% $250k MFJ $125k MFS $200k Single $200k Head of Household $200k Qualifying Widower
*What categories are included in payroll taxes?
OASDI and Medicare
Congress enacted this in 1974 to provide protection to an employees retirement assets both from creditors and plan sponsors
ERISA
Because a qualified plan is designed to provide individuals income at retirement ERISA provides ____________ protection over plan assets in case of bankruptcy.
Anti-Alienation
*A court order related to divorce, property settlement, child support, federal tax levy, or criminal event. IRA assets do not have anti-allienation protection in this instance.
QDRO - Qualified Domestic Relations Order
This act clarifies that retirement assets that are exempt from tax under the internal revenue code are also exempt from the debtors estate up to $1MM.
BAPCPA 2005 (Bankruptcy Abuse Protection and Consumer Protection Act)
*Long term, PART TIME employees can make elective deferrals to a qualified plan if:
1) Employee worked at least 500 hours per year for 3 consecutive years (years prior to 2021 do not count)
2) Is age 21 by the end of the 3 consecutive years
How many plan entrance dates are there per year?
2 usually 6 months apart (because the employer may allow participants to wait until the plan entrance date but the employer is not allowed to make employees wait more than 6 months)
*What is the special exception eligibility rule to qualified plans? (Not available to 401(k) plans).
A qualified retirement plan may make an employee complete 2 years of service before they are elligible to participate in the plan. Employer must allow for immediate vesting if electing this option.
*An employee would be considered to have a year of service after completing both:
1) 12 months of service
2) 1000 hours of service
*What defines a Highly Compensated Employee? (Not to be confused with a Key employee)
1) Anyone who owns more than 5% of a company’s stock or capital in the current year (or did in the previous year)
2) Income exceeds $135,000 (2022 compensation limit provided)
________________________ consider shares of stock owned by relatives including: spouse, children, grandchildren, or parents as if owned by one owner.
Family attribution rules
*Employers can elect to limit highly compensated employees to top _____ %
20%
How does a qualified retirement plan pass the general safe harbor coverage test?
If the plan benefits 70% or more of nonexcludable non-highly compensated employees
For a plan to classify as no discriminatory it must pass 2 tests:
1) Safe Harbor Test
2) Facts and Circumstances Test
To be considered ‘Qualified’ a retirement plan must pass one of the three following tests:
A defined benefit plan must also pass the __________.
1) General Safe Harbor Test
2) Ratio Percentage Test
3) Average Benefits Test
50/40 Rule
*How are the following calculated?
1) General Safe Harbor Test
2) Ratio Percentage Test
3) Average Benefits Test
1) General Safe Harbor Test = % NHC employees covered >= 70%
2) Ratio Percentage Test = (% NHC Covered) / (% HC Covered) >= 70%
3) Average Benefits Test = AB% of NHC/ AB% of HC >= 70%
*What is the 50/40 Rule?
That a defined benefit plan benefit the LESSER of:
50 non-excludable, elligible employees
40% of all non-excludable elligible employees (on each day of the plan year)
The transfer of ownership of employer contributed assets to the employee over a specific period of time.
Vesting
*Deferred eligibility to a qualified plan requires immediate vesting after __________ of service.
2 years
**As a result of the PPA 2006 a profit sharing plan must vest at least as rapidly as a ________ cliff or a __________ graduated schedule. (For defined benefit for years after 2006 and defined contribution plans)
3 year cliff
2-6 year graduated schedule
*What is the permitted defined contribution 2-6 year graduated vesting schedule?
Year 1 - 0% Year 2 - 20% Year 3 - 40% Year 4 - 60% Year 5 - 80% Year 6 - 100% Year 7 - 100%
The determination of years of service is based on the employees ___________________________ .
Beginning date of employment
*What is the permitted 3 year cliff defined contribution vesting schedule?
Year 1- 0%
Year 2- 0%
Year 3- 100%
*How is the vested balance for interest earned on a qualified defined contribution plan determined for a plan that maintains the least generous graduated vesting schedule?
For Employee:
Total Interest Earnings X (Employee Contributions / Total Contributions) (X Vested % based on schedule)
For Employer:
Total Interest Earnings X (Employer Contributions / Total Contributions) (X Vested % based on schedule)
**What defines a “Key Employee?”
- a GREATER THAN 5% Owner
- Greater than 1% Owner with compensation in excess of $150k
- Officer with compensation in excess of $200,000 (provided)
- Key Employee MUST be either an officer or an owner regardless of salary
*What defines a “Top-Heavy Plan?”
If > 60% of benefits or contributions are going to key employees
*What is the minimum funding requirement for Top Heavy defined contribution plans non key employees?
3% of salary OR equal to that of key employees if less than 3%
*What is the minimum funding requirement for Top Heavy defined benefit plans non key employees?
2% X Years of Service X Compensation Factor
**Maximum annual expected benefit allowed as of 2022 for defined benefit plans?
$245,000 OR 100% of the average of the employees 3 highest consecutive years of compensation (during participation considering covered compensation limit)
Maximum contribution per participant for defined contribution plans?
Lesser of 100% of employees compensation
OR
Up to $61,000 for 2022 (not including the catch up contribution of $6500)
Describes the maximum contribution which is an aggregate amount including employer and employee contributions to the plan along with any forfeitures.
415c Limit
*Employers maximum tax deductible amount is _________ of employers total covered compensation paid on defined contribution plans?
25%
*Any forfeiture is counted towards the ___________________ .
Contribution Limit for the year
Two or more trades or businesses under common control
Control group
**A parent subsidiary control group exists when one or more corporations are connected through stock ownership of what percentage?
80% ownership of stock in another corporation
Controlling interest generally equals _____ % or more.
Effective control generally means _____ % or more.
80%
50%
Group of two or more corporations in which 5 or fewer common owners own directly or indirectly a common interest.
Brother-Sister Relationship
When different businesses are all members of the same combined group under common control.
Combined Group
Rules for this type of group treats all of the employees of the memberships of an affiliated service group as if a single employer employed them.
Affiliated Service Group
*When determining an employees eligibility for entrance to a plan one must consider:
1) Age
2) Start date
3) Entrance Dates (allowable days of entry by company) - PAY ATTENTION sometimes although employee has completed service requirements the entrance date is not open for a couple more months
How much corporate stock are ESOPs permitted to hold in the trust?
100%
Under the IRC, qulaified participants may force diversification of their holdings if they are at least ______________________________________________________ .
55 years old and have completed at least 10 years of participation in the ESOP
The qualified participant of the plan (ESOP) must be offered a diversification election option within _____ days after the close of each plan year beginning with the year after the employee becomes qualified.
90
The participant of an ESOP may elect to diversify up to _____ of the account balance into one of the plans alternative investment options.
25 percent
In the final year of the 6 year election period for ESOPs the diversifiable percentage is increased to _______ %.
50%
