RPF M1 U6 How Does a Plan Maintain Tax Qualification Flashcards
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What must a tax-qualified plan do to maintain its status?
It must meet ongoing requirements and undergo annual testing.
Who performs testing to a sponsor 401(k) Plan?
A third party administrator (TPA), Plan Administrative Services.
What federal agencies oversee retirement plans?
The DOL oversees ERISA Title I rules, while the IRS oversees tax qualification under ERISA Title II.
What is the role of the plan document in maintaining tax qualification?
A signed plan document is required for tax qualification and provides the roadmap for plan operation.
What is annual plan testing?
It ensures that plans do not discriminate against nonhighly compensated employees and that a sufficient percentage of NHCEs participate.
What is ‘benefiting’ in the context of retirement plans?
Participants who receive or make a contribution to the plan, or were eligible to do so, are considered benefiting.
What is coverage testing?
It compares the number of highly compensated employees (HCEs) benefiting under the plan to the number of nonhighly compensated employees (NHCEs) benefiting.
What defines a highly compensated employee (HCE)?
An employee who owned more than 5% of the employer or received compensation above a specified limit in the preceding year.
What defines a nonhighly compensated employee (NHCE)?
An employee who is not classified as a highly compensated employee (HCE).
What is nondiscrimination testing?
It compares the benefits or contributions of HCEs and NHCEs to ensure the plan does not discriminate against NHCEs.
What is the goal of ERISA?
To protect the interests of participants and their beneficiaries in employee benefit plans.
What is the Form 5500?
An annual return that contains information about the plan, its participants, and its financial situation.
What are the two types of plan documents?
Preapproved plans and individually designed plans.
What is a preapproved plan?
A plan created by a service provider that employers adopt, which receives a favorable IRS opinion letter.
What is an individually designed plan?
A custom plan document prepared by an ERISA lawyer or service provider for specific design needs.
What must a qualified plan document include?
Eligibility and participation, compensation definitions, contributions, vesting, distributions, compliance tests, and participant rights.
What is the significance of vesting schedules?
They determine how employees become entitled to their employer contribution accounts.
What are the required compliance tests for qualified plans?
Tests to ensure that benefits and contributions do not favor HCEs over NHCEs.
What happens if a plan fails coverage or nondiscrimination tests?
The TPA can consult on possible plan designs to be exempt from testing or on how to correct failed tests.
