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”