Retirement Plans - Qualified Plans

Question 1

Defined benefit plan (3)

Answer 1

• Guarantees the retirement benefits
• Usually expressed in terms of an annual sum equal to a percentage of a participant’s preretirement pay multiplied by the number of years he or she has worked for the employer
• Sometimes referred to as pension plans

Question 2

Defined contribution plan (3)

Answer 2

• Employees make annual contributions to their individual investment accounts, based on a formula contained in a plan document
• Employers may choose to make matching contributions to employees’ accounts
• Amount received depends on the performance of the selected financial investment

Question 3

13 minimum standards of qualified plans (ERISA)

Answer 3

1. Participation requirements
2. Coverage requirements
3. Vesting rules
4. Accrual rules
5. Nondiscrimination rules: Testing
6. Top-heavy provisions
7. Minimum funding standards
8. Social Security integration
9. Contribution and benefit limits
10. Plan distribution rules
11. Qualified survivor annuities
12. Qualified domestic relations orders
13. Plan termination rules and procedures

Question 4

Advantage of qualified plans

Answer 4

Provides both employers and employees with immediate tax benefits

Question 5

Employees must be allowed to participate in employer-sponsored plans after? (2)

Answer 5

1. age 21

2. completion of one year of service (based on 1,000 work hours)

Question 6

Coverage requirements

Answer 6

Limit the freedom of employers to exclude employees

Question 7

Two tests for coverage requirements

Answer 7

1. Ratio percentage test

2. Average benefit test

Question 8

Purpose of ratio percentage and average benefit tests

Answer 8

To maintain a nondiscriminatory ratio of nonhighly compensated employees

Question 9

Ratio percentage test

Answer 9

Qualified plans cover a percentage of nonhighly compensated employees that is at least 70% of the percentage of highly compensated employees covered by the plan.

Question 10

Average benefit test

Answer 10

Qualified plans benefit a “nondiscriminatory classification” of employees and possess an “average benefit percentage” for nonhighly compensated employees that is, at a minimum, 70% of the average benefit percentage for highly compensated employees

Question 11

Vesting

Answer 11

An employee’s nonforfeitable rights to retirement benefits

Question 12

DB plan vs. DC plan vesting

Answer 12

DBP: employees vest in a specific annual amount, as defined under the terms of the plan, each year after retirement

DCP: employees vest in net employer contribution (net employer contributions = gross employer contributions + investment gains - investment losses)

Question 13

2 schedules for vesting rights

Answer 13

1. Cliff vesting

2. Six-year graduated schedule

Question 14

Cliff vesting

Answer 14

Must grant employees 100% vesting after no more than three years from beginning participation in the retirement plan, or else employee loses all the accrued employer contributions

Question 15

Six-year graduated schedule

Answer 15

Allows workers to become 20% vested after two years and vest at a rate of 20% each year thereafter until they are 100% vested after six years from beginning participation in the retirement plan

Question 16

Accrual rules

Answer 16

The rate at which participants accumulate benefits

Question 17

Nondisrimination rules

Answer 17

• Prohibit employers from favoring highly compensated employees in making contributions or benefits, availability of benefits, rights, or plan features.
• Employers may not amend retirement plans so that highly compensated employees are favored

Question 18

Nondiscrimination requirement may be fulfilled in what 2 ways?

Answer 18

1. Safe harbors

2. facts-and-circumstances testing

Question 19

Safe harbors

Answer 19

Compliance guidelines in a law or regulation

Question 20

Facts-and-circumstances testing

Answer 20

Must pass at least one of two of these tests when safe harbors are not met

Question 21

Top-heavy provisions

Answer 21

A plan that provides non-key employees with a minimum benefit if it is a defined benefit plan or a minimum contribution if it is a defined contribution plan.

Question 22

A defined benefit plan is top-heavy if

Answer 22

The present value of the accrued benefits (PVAB) under the plan for the key employees exceeds 60% of the PVAB under the plan for all employees

Question 23

A defined contribution plan is top-heavy if

Answer 23

The total of the accounts of the key employees under the plan exceeds 60% of the total of the accounts of all employees under the plan

Question 24

A top-heavy plan must also provide what?

Answer 24

a special vesting schedule (cliff or 6-year)

Question 25

Minimum funding standards

Answer 25

Ensure that employers contribute the minimum amount of money necessary to provide promised benefits

Question 26

Social Security integration (permitted disparity rules)

Answer 26

Allows employers to explicitly take into account Social Security retirement benefits when determining company-sponsored benefits under a defined benefit plan.

Question 27

Benefit limits

Answer 27

The maximum annual amount an employee may receive from a qualified defined benefit plan during retirement

Question 28

Contribution limits

Answer 28

Like benefit limits, but for defined contribution plans

Question 29

Distribution

Answer 29

The payment of vested benefits to participants or beneficiaries

Question 30

3 events that may trigger a distribution:

Answer 30

1. participant’s termination of service with the employer
2. 10th anniversary of the year the participant commenced participation in the plan
3. The participant’s attainment of the earlier of age 65 or the normal retirement age

Question 31

3 allowable distribution methods

Answer 31

1. lump sum distributions
2. annuities
3. series of payments from a trust fund

Question 32

lump sum distributions

Answer 32

single payments of benefits

Question 33

annuities

Answer 33

a series of payments for the life of the participant and beneficiary

Question 34

2 types of qualified survivor annuities

Answer 34

1. qualified joint and survivor annuity (QJSA)

2. qualified preretirement survivor annuity (QPSA)

Question 35

QJSA

Answer 35

a lifetime annuity for the participant and an annuity for the surviving spouse

Question 36

QPSA

Answer 36

provides a lifetime annuity for the surviving spouse if the participant dies before receiving any retirement benefits

Question 37

qualified domestic relations orders (QDROs)

Answer 37

permit a retirement plan to divide a participant’s benefits in the event of divorce

Question 38

Plan termination rules

Answer 38

Protect employees who participated in either a defined benefit or defined contribution plan that was terminated. When a plan is terminated, employees must become 100% vested in all amounts, regardless of whether vesting requirements were met.