Retirement Planning - Intro to Qualified Plans Flashcards
What are the different qualified plans?
What is a pension Plan?
Qualified retirement plan that pays a benefit, usually determined by a formula, to a plan participant for the participants entire life during retirement.
What is a profit sharing plan?
Plan participants usually become responsible for the management of the plans assets and sometimes for personal contributions to the plans.
Pension plan vs. profit sharing plan
Defined benefit plans vs defined contribution plans
What are the employer advantages of a qualified plan?
- Current income tax deduction
2. Payroll tax savings
What are the employee/participant advantages of a qualified plan?
- income tax deferrals
- payroll tax savings
- federally provided creditor asset protection.
How are employer contributions to a qualified plan taxed?
Employers and employees are exempt from payroll taxes (15.3 OASDI) on employer contributions to a qualified retirement plan.
this does not apply to employee contributions to 401k, 403b, Simples, SARSEPS, and 457 plans.
What is the ERISA act of 1974?
- employee retirement income and security act.
- provides protection for an employees retirement assets, from both creditors and plan sponsors
- qualified plans are not protected from QDRO orders (Divorce, property settlement, or child support), federal tax levy, or from a crime related to the plan
Advantages of qualified plans
Disadvantages of qualified plans
What are the eligibility requirements for Qualified Retirement Plans?
- Standard is employee is eligible to participate after after completing a period of service that extends beyond the later of either the attainment of age 21 or the completion of one year of service (12 month period in which the employee works at least 1,000 hours)
- Employers can be more generous, such as having age requirement of 19 or 20, or having service requirement of less than 1 year.
What are the plan entrance date requirements?
- Employer may require employees to wait until the next plan entrance date after the employee has become eligible to join the plan, as long as the next available entrance date is not more than 6 months after the date of eligibility determined above.
- most qualified retirement plans establish two plan entrance dates a year.
What is the special eligibility Rule Exception?
- Qualified retirement plan may require an employee complete two years of service to be eligible for participation in the plan.
- If elected, plan participants are immediately vested in their accrued benefit or account balance upon completion of two years of service.
- NOT for 401k plans
What is the eligibility requirements for part time employees?
-Long term part time employees can contribute if they have worked at least 500 hours per year for three consecutive years and is age 21 by the end of the three years.
Are non “eligible” employees included in coverage requirement test?
No, only eligible employees must be considered and not all must be covered for the plan to maintain its qualified status.
When is an employee considered covered by a qualified retirement plan?
- when he receives a benefit from the plan.
- a benefit is an employer contribution, an accrued benefit, or the right to participate in the case of a 401k.
Who is considered a Highly Compensated employee?
either:
1. a more than 5 percent owner at anytime during the plan year or preceding plan year.
- an employee with compensation in excess of $135,000 for the prior plan year.
- a 5 percent owner is anyone who owns more than 5 percent of a companies stock or capital. if its exactly 5 they are not HCE.
- the 5 percent rule includes stock owned by certain relatives (spouse, children, grandchildren, parents)
what is the 20% election?
An employer can elect to limit highly compensated employees to those with compensation in excess of the annual limit AND who are in the top 20% of paid employees as ranked by compensation.
-this may shift some employees as NHC who have income above the annual limit, to help meet testing.
What are the three coverage test?
- The General Safe Harbor Test
- The Ratio Percentage Test
- The average benefits test
YOU ONLY NEED TO PASS ONE OF THE THREE
If plan fails to meet all of the coverage test, it is subject to disqualification.
What is the General Safe Harbor Test?
Qualified Retirement Plan satisfies this test if the plan benefits 70 percent or more of the nonexcludable (eligible), non highly compensated employees.
-if you pass this test move on.
What is the Ratio Percentage Test?
Compares the percentage of covered nonhighly compensated employees to the percentage of covered highly compensated employees.
if ratio is above 70% you are good to go!
What is the average benefit test?
Consists of two test:
- Average Benefits Percentage test - retirement plan satisfies the average benefits percentage test if the following ratio is at least 70%
Average Benefit percentage of NHC employees/Average benefit of HC employees >= 70%
- Non Discriminatory Classification Test
must meet one of two test
Safe harbor - ratio percentage>=employers safe harbor percentage
Facts and Circumstances test - Ratio Percentage>=unsafe harbor percentage
What is the Defined Benefit 50/40 test?
In addition to the three coverage test a defined benefit plan must meet the 50/40 coverage test
the 50/40 coverage test requires the defined benefit plan to benefit the lesser of 50 nonexcludable (eligible) employees or 40 percent of all non excludable (eligible employees on EACH DAY of the plan year.
its 50 employees or 40%, “people come first”
What is a graduated vesting schedule?
Provides an employee with full rights to a certain percentage of benefits after completing a certain number of years of service and provides the employee with an additional percentage for additional years of service.
Defined Contribution plans - 2 to 6 year graduated.
Defined benefit plans - 3-7 year graduated
Defined Benefit (Top Heavy Plan) - 2-6 year graduated.
What is a cliff vesting schedule?
A cliff vesting schedule provides an employee full rights to the plans assets immediately upon the passage of a certain numbers of years of service.
Defined Contribution Plans - 3 year cliff
Defined Benefit Plans - 5 year cliff
Defined Benefit (Top Heavy) - 3 year cliff.
Can employers provide a vesting schedule faster than the standard schedule?
-Yes employers can provide a vesting schedule faster than the standard schedule.
What is considered years of service?
Years of service determination is based on the number of years, defined as a 12 month consecutive period with at least $1,000 hours worked for the employer.
Employer does not have to count:
1. years of service the employee acquired with the employer before reaching the age of 18 if the employee was not participating at that time.
- years of service the employee attained before the employer sponsored a qualified plan
- years of service the employee attained during years when he did not contribute to an employee contributory qualified plan.
How are vested balances calculated?
When is a qualified plan considered Top Heavy?
Defined Benefit Plan - present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60 percent of the present value of the total accrued benefits of the defined benefit plan for all employees.
Defined Contribution Plan - Aggregate account balances of key employees in the plan exceeds 60 percent of the aggregate of the accounts of all employees.
Trick: if >60% of benefits or contribution are going to key employees THINK Top Heavy.
Who is Considered a key Employee for top heavy plans?
-greater than 5% owner, or
greater than 1% owner with compensation in excess of $150,000
-an officer with compensation in excess of $200,000 for 2022.
What are Top Heavy Plan requirements for Funding and Vesting?
Vesting:
If qualified defined benefit retirement plan is top heavy, the plan must accelerate the vesting from standard vesting schedules to either a 2-6 year graduated or a 3 year cliff vesting schedule.
Funding: The sponsor of a top-heavy plan MUST provide its non-key employees with a minimum level of funding.
Defined Contribution - 3% of compensation for nonkey/nonexcludable employees.
*If key employees are getting less than 3% then contribution percentages to nonkey employees just have to match contribution for Key Employees.
Defined Benefit - 2% x years of service x employees average annual compensation over the testing period.
What is the covered Compensation Limit?
- Any plan funding formula that requires the use of the employees compensation cannot consider any compensation amount above the covered compensation limit.
- the limit for this year is $305,000
What are forfeitures and how do they work?
Forfeitures are amounts allocated from an unvested employment who terminated employment during the year to other participants.
Forfeitures are considered a contribution to the plan when determining the maximum annual limit.
What is the employer contribution deduction limit?
Employer cannot deduct contributions to defined contribution plans in excess of 25% of the employers total covered compensation
Employer Deductions for DB Plans are covered by an actuary
Defined Benefit and contribution plan limits?
VERY IMPORTANT
What is a controlled group?
- Designed to prevent an owner from splitting their business into multiple parts and creating multiple plans allowing for increased retirement contributions.
- Controlled group is a combination of two or more trades or businesses that are under common control.
- Control Group exists if the businesses have one of the following relationships:
- parent subsidiary
- brother-sister, and
- combined group
What is Parent-Subsidiary Relationship?
-one or more corporations are connected through stock ownership with a common parent corporation, and
80 percent of the stock of each corporation, is owned by one or more corporation in the group; and
the parent corporation owns 80 percent of at least one other corporation.
What is a brother-sister relationship?
-A brother sister controlled group is a group of two or more corporations, in which 5 or fewer common owners own directly or indirectly a controlling interest of each group and have effective control.
Controlling interest = 80% or more of the stock of each corporation
Effective control = more than 50% of the stock of each corporation, but only to the extent such stock ownership with respect to such corporation.
What is a combined group?
-Consists of three or more organizations that are organized as follows:
Each organization is a member of either a parent subsidiary or a brother-sister group; and
at least one corporation is the common parent of a parent subsidiary and is also a member of a brother sister group.
Highly compensated vs key employees
