RPF M2 U3 Contribution Types

Question 1

What is an After-tax Contribution?

Answer 1

A type of employee deferral that is taxed at the time it is contributed; the money is not taxed when it is withdrawn, provided certain conditions are met. Unlike Roth contributions, the earnings on after-tax contributions are subject to taxation upon distribution.

Question 2

What is a Catch-up Contribution?

Answer 2

A contribution that allows employees 50 years or older to contribute above the limits set by the plan or the 402(g) limit.

Question 3

What is a Matching Contribution?

Answer 3

An employer contribution that is made to the plan based on a participant’s contribution. The employer may match all or part of the employee’s pre-tax, catch-up, designated Roth, and/or after-tax employee contributions.

Question 4

What is a Nonelective Contribution?

Answer 4

A contribution made by the employer on the participant’s behalf. No ‘election’ by the participant is required (unlike matching contributions). A profit-sharing contribution is a nonelective contribution.

Question 5

What are Pension Linked Emergency Savings Accounts?

Answer 5

An optional plan feature that would allow non-highly compensated employees to save up to $2,500 in a Roth-like account that can be withdrawn for financial emergencies.

Question 6

What are Pre-tax Deferrals?

Answer 6

A type of employee elective deferral that is not subject to taxation when it is contributed.

Question 7

What is Pro rata Allocation?

Answer 7

A method of profit-sharing allocation in which each eligible participant receives the same percentage of eligible compensation as a contribution.

Question 8

What is a Qualified Matching Contribution (QMAC)?

Answer 8

A matching contribution that is 100% vested and subject to withdrawal restrictions. It may be used to help a plan pass nondiscrimination testing.

Question 9

What is a Qualified Nonelective Contribution (QNEC)?

Answer 9

An employer contribution that is 100% vested and subject to withdrawal restrictions. It may be used to help a plan pass nondiscrimination testing.

Question 10

What is a Rollover?

Answer 10

A method of transferring assets from one qualified plan to another (either an IRA or another qualified plan), allowing for continued tax-deferral.

Question 11

What is a Roth Contribution?

Answer 11

A type of employee elective deferral or employer contribution that is taxed at the time it is contributed. At the time of distribution, if the designated Roth contributions meet certain requirements, earnings on the designated Roth contributions may be withdrawn tax-free.

Question 12

What are the options participants have regarding contributions?

Answer 12

Participants can make pre-tax deferrals, Roth contributions, and after-tax contributions.

Question 13

What options do employers have regarding contributions?

Answer 13

Employers can make matching contributions, nonelective contributions, and profit-sharing contributions.

Question 14

How is money from an employer divided among participants in the plan?

Answer 14

It can be divided using methods such as pro rata allocation or based on matching formulas.

Question 15

What are Pre-tax Deferrals subject to?

Answer 15

They are subject to Federal Insurance Contributions Act (FICA) taxes or Federal Unemployment Tax Act (FUTA) taxes in the year contributed.

Question 16

What is the maximum contribution limit for pre-tax deferrals and Roth contributions in 2023?

Answer 16

$22,500 for 2023.

Question 17

What are Catch-up Contributions?

Answer 17

Additional contributions that can only be made by a participant who is at least age 50 by the last day of that calendar year.

Question 18

What is the maximum catch-up limit for 2023?

Answer 18

$7,500 for 2023.

Question 19

What are the benefits of employer contributions?

Answer 19

They help attract and retain employees, assist employees in saving for retirement, and provide tax deductions for the company.

Question 20

How are matching contributions calculated?

Answer 20

1. Determine the maximum amount provided by the employer as a percent of compensation. 2. Calculate the percentage of compensation the employee deferred. 3. Multiply the % of compensation deferred by the % of the match. 4. Apply any other limits.

Question 21

What is the allocation for a participant who deferred $5,000 of their $50,000 compensation with a 50% match?

Answer 21

$2,500.

Question 22

What is the allocation for a participant who deferred $5,000 of their $50,000 compensation with a 50% match up to 3%?

Answer 22

$750.

Question 23

What is the individual match allocation for Naomi?

Answer 23

$50,000

Individual Match Allocation: $5,000, $750, $750

Question 24

What is the employer match structure in Example 7?

Answer 24

100% on the first 3% of compensation and 50% on the next 2% of compensation.

Question 25

What is the eligible compensation for Alice in Example 7?

Answer 25

$65,000

Question 26

What is Alice's pre-tax deferral in Example 7?

Answer 26

$2,600

Question 27

What is the total match Alice receives in Example 7?

Answer 27

$2,275

Question 28

What is the match calculation for Alice in Example 7?

Answer 28

3% = $1,950 (100% match) + 1% = $325 (50% match) = $2,275.

Question 29

What is the employer match structure in Example 8?

Answer 29

25% of deferrals, not to exceed $1,000.

Question 30

What is Rafe's eligible compensation in Example 8?

Answer 30

$45,000

Question 31

What is Rafe's pre-tax deferral in Example 8?

Answer 31

$4,500

Question 32

What is the total match Rafe receives in Example 8?

Answer 32

$1,000

Question 33

What is the contribution period for matching contributions?

Answer 33

Defined by the employer; can be each payroll or annually.

Question 34

What are Qualified Matching Contributions (QMACs)?

Answer 34

Matching contributions that are 100% vested at the time of contribution.

Question 35

What are nonelective contributions?

Answer 35

Contributions given to all eligible participants, regardless of their own contributions.

Question 36

How is a pro rata profit-sharing contribution calculated?

Answer 36

Eligible Compensation × % of Compensation = Individual Allocation.

Question 37

What is the total eligible compensation for participants in Example 9?

Answer 37

$400,000

Question 38

What is the individual allocation for Naomi in Example 10?

Answer 38

$2,500

Question 39

What is the maximum amount of compensation considered for contributions?

Answer 39

$330,000 for 2023.

Question 40

What are Qualified Nonelective Contributions (QNECs)?

Answer 40

Nonelective contributions that are 100% vested at the time of contribution.

Question 41

What is the deadline for employer contributions to benefit from tax deductions?

Answer 41

Contributions must be made by the filing deadline of the employer's tax return.

Question 42

What options do participants have regarding their contributions?

Answer 42

Participants can choose the amount of contributions under certain limits and may contribute on a pre-tax or after-tax basis.

Question 43

What options do employers have regarding contributions?

Answer 43

Employers can include matching or profit-sharing contributions, which may be discretionary or mandatory.

Question 44

How are employer contributions allocated among participants?

Answer 44

Matching contributions are based on employee deferrals; profit-sharing contributions may be allocated using the pro rata method.