Types of Qualified Employer Plan Flashcards
Defined Benefit Plans
- A defined benefit plan is a qualified plan in which the ________ makes contributions to provide a specified benefit at the participants’ retirement.
- When someone speaks of a ______, the reference is usually to a defined benefit plan.
- The benefit is typically paid ________ and usually for ____ .
Defined benefit plans may define retirement benefits as
- a percent of final ______ (such as 50 percent of final salary, payable monthly, for life);
- a percent of salary times the number of years of employment (such as 3 percent of salary times number of years of employment, payable monthly, for life);
- or a specified dollar amount (such as $300 a month, payable for life).
- A defined benefit plan is a qualified plan in which the employer makes contributions to provide a specified benefit at the participants’ retirement.
- When someone speaks of a pension, the reference is usually to a defined benefit plan.
- The benefit is typically paid monthly and usually for life.
Defined benefit plans may define retirement benefits as
- a percent of final salary (such as 50 percent of final salary, payable monthly, for life);
- a percent of salary times the number of years of employment (such as 3 percent of salary times number of years of employment, payable monthly, for life);
- or a specified dollar amount (such as $300 a month, payable for life).
The employer’s annual contribution to a defined benefit plan is determined by the amount of future benefits it agreed to fund and the date on which those benefits are scheduled to start. Under a defined benefit plan, no individual accounts are set up for employees. When the employee reaches retirement, the employer typically uses plan funds to buy an annuity on the retiree’s behalf. The annuity pays the specified benefit. If the participant is married, the payout will be in the form of joint and survivor annuitized income, unless he or she chooses—with the spouse’s approval—otherwise. Currently, tax laws control the maximum amounts that are contributed to a defined benefit plan. They do this by limiting the maximum benefit that such plans can pay out for any one participant.
As of 2018, the maximum annual benefit that a participating defined benefit employee can receive is the lesser of $220,000 or 100 percent of the retiree’s final average gross salary. (This amount is subject to adjustment and is likely to change in future years.)
Life insurance generally cannot be used as a qualified retirement plan funding vehicle—with one exception: the ______ plan.
- It is qualified and defined benefit plan that uses _____________ and ____________ in its funding.
- It features ____________ interest, which is an attractive feature when dealing with a retirement plan that guarantees a specified retirement income.
- Premiums are _______________ as a qualified plan contribution,
- Plan participants are taxed on the cost of the _______ life insurance protection each year.
Life insurance generally cannot be used as a qualified retirement plan funding vehicle—with one exception: the 412(i) plan.
- 412(i) plan is QUALIFIED AND defined benefit plan that uses whole life insurance and deferred annuities in its funding.
- The 412(i) plan features guaranteed interest, which is an attractive feature when dealing with a retirement plan that guarantees a specified retirement income.
- premiums are tax-deductible as a qualified plan contribution,
- Plan participants are taxed on the cost of the pure life insurance protection each year.
A defined contribution plan defines the contributions that the ____________ makes on the employee’s behalf.
With a defined contribution plan, individual accounts are set up for each _____________ employee.
Employer contributions are based on a pre-determined formula that does not __________ among employees.
2 ways to fund an account …
- Annual contributions for each employee in an amount equal to ____ percent of his or her salary (called a _________ _________ _____ )
- the plan could be funded with company ______. This is called a ________ ______ plan.
In 2018, the maximum contribution that can be made on behalf of any one participating employee is the lesser of _____ percent of his or her compensation or $_________.
A defined contribution plan defines the contributions that the employer makes on the employee’s behalf.
With a defined contribution plan, individual accounts are set up for each participating employee.
Employer contributions are based on a pre-determined formula that does not discriminate among employees.
2 ways to fund an account …
- Annual contributions for each employee in an amount equal to 3 percent of his or her salary (called a Money Purchase Plan)
- Or, the plan could be funded in such a way that the benefit is funded with company stock. This is called a Stock Bonus plan.
In 2018, the maximum contribution that can be made on behalf of any one participating employee is the lesser of 100 percent of his or her compensation or $55,000.
Profit-Sharing Plans allows …
- The employer is the _____ contributor to the plan.
- The formula is usually based on a _______ of the employee’s salary.
- The employer _______ have to make contributions every year. Nor do the contributions have to be in the _____ amount every year.
A profit-sharing plan is a form of defined contribution plan. It allows employees to share in the profits of the employer.
- The employer is the sole contributor to the plan. The contributions, which are directed into individual accounts for each participant, are calculated using a pre-determined formula.
- The formula is usually based on a percentage of the employee’s salary.
- the employer does not have to make contributions every year. Nor do the contributions have to be in the same amount every year.
But, to remain qualified, a profit-sharing plan must be maintained with substantial and recurring contributions.
Contribution limits for profit-sharing plans are the same as those that apply in general to defined contribution plans. (For example, in 2018, the employer can contribute no more than $55,000 or 100 percent of earnings, whichever is less, for any one participant.)
A 401(k) Plan allows _____ employer and employees to contribute to the plan. .
Employees can ______ part of their wages into the plan which ______ their current taxable earnings while accumulating tax-deferred money for retirement.
An employee contribution is known as an ____________ ________ .
Requires a participant to _______ the amount of contribution he or she will make as a ___________ of his or her salary.
The maximum amount that any employee can defer into a 401(k) plan is limited by the tax laws. In 2018, this amount is $________ .
Participants who are age 50 and older can choose to defer additional amounts, known as catch-up contributions = $________ .
Most 401(k) plans include a provision for ________ contributions by the employer.
Employer contributions to a 401(k) plan are ______ currently taxable to the employee.
One of the most popular types of qualified plan is the 401(k) plan.
The 401(k) allows both employer and employees to contribute to the plan.
Under a 401(k) plan, employees can defer part of their wages into the plan. These deferrals are not included in the employee’s gross income. As a result, they are not taxed at the time they are deferred into the plan.
Thus employees who participate in a 401(k) are able to lower their current taxable earnings while accumulating tax-deferred money for retirement.
Employee contributions to a 401(k) plan are known as elective deferrals because employees can choose
- whether to participate in the plan and
- whether to defer a portion of their wages into the plan if they choose to participate.
Requires a participant to specify the amount of contribution he or she will make as a percentage of his or her salary.
The maximum amount that any employee can defer into a 401(k) plan is limited by the tax laws. In 2018, this amount is $18,500.
Participants who are age 50 and older can choose to defer additional amounts, known as catch-up contributions = $6,000.
Most 401(k) plans include a provision for matching contributions by the employer. This means that for every $1 the employee contributes, the employer matches with a contribution of 50 cents or some other amount.
Employer contributions to a 401(k) plan are not currently taxable to the employee.
Safe Harbor 401(k) Plan
What is a “top heavy” plan and how does it occur?
What could happen if a plan is too top heavy?
How does adopting a safe harbor plan protect employers?
In a Safe Harbor 401(k) plan, all employer contributions must be _______ ______ immediately.
There are also special contribution requirements. For example, an employer may choose to
- match all employee contributions up to ___ percent or
- make a ___ percent contribution on behalf of all employees (even those who don’t contribute to the plan).
Safe Harbors are particularly popular with …
Regular 401(k) plans must comply with a variety of IRS requirements to avoid discriminating in favor of highly compensated employees and creating a “top heavy” plan.
A top heavy plan is one that results in highly compensated employees receiving more from the plan, as a percentage of pay, than other employees.
If a plan is found to be “top heavy,” the IRS could move to disqualify it. A plan risks becoming top heavy if too few rank-and-file employees participate in comparison to highly compensated employees.
A Safe Harbor 401(k) plan is a class of 401(k) plan that, if adopted, assures employers that their plan will not be later deemed top heavy, regardless of employee participation.
In a Safe Harbor 401(k) plan, all employer contributions must be fully vested immediately.
There are also special contribution requirements. For example, an employer may choose to
- match all employee contributions up to 4 percent or
- make a 3 percent contribution on behalf of all employees (even those who don’t contribute to the plan).
Safe Harbor 401(k) plans are especially popular with smaller businesses, which are at greatest risk of finding themselves with a top heavy plan.
Single (K) Plan offers the same tax benefits to …
Single (K) plan offers the same tax advantages of a 401(k) plan but is available to
Because contributions may be made both by the employer and the employee (who are often the same person), a Single (K) plan provides an opportunity to ___________ than would be possible with either a simplified employee pension (SEP) plan or a profit-sharing plan.
As popular as 401(k) plans are, they are not available to self-employed individuals.
Single (K) plan, which offers the same tax advantages of a 401(k) plan but is available to
- sole proprietors and
- corporations that employ only part-time employees.
Because contributions may be made both by the employer and the employee (who are often the same person), a Single (K) plan provides an opportunity to save more than would be possible with either a simplified employee pension (SEP) plan or a profit-sharing plan.
Similar in concept to a 401(k) plan is the 403(b) plan, otherwise known as a ____ ___________ annuity plan (TSA).
Tax-sheltered 403(b) plans are available only to _____________ organizations and their employees.
In 2018, the maximum amount an employee can contribute to a 403(b) plan is $________.
An additional catch-up limit is $________ for those who are 50 or older.
Similar in concept to a 401(k) plan is the 403(b) plan, otherwise known as a tax-sheltered annuity plan (TSA).
Tax-sheltered 403(b) plans are available only to nonprofit organizations and their employees.
These contributions are not taxable to the employee when they are made. Rather, they grow tax-deferred until they are distributed.
They are limited to the same levels as those that apply to 401(k) plans. In 2018, the maximum amount an employee can contribute to a 403(b) plan is $18,500. (An additional catch-up limit is $6,000 for those who are 50 or older.)
Section 457 plans are qualified retirement plans available only to employees of __________________________________ .
Section 457 plans are qualified retirement plans available only to employees of state and local government units.
- Eligible employees are allowed to make elective salary deferrals into the plan on a pre-tax basis.
- Earnings accumulate tax-deferred.
- Everything taxed when withdrawn or distributed.
A thrift savings plan (TSP) is an investment and retirement account available only to _______ employees and persons in _________ service.
A thrift savings plan (TSP) is an investment and retirement account available only to federal employees and persons in military service.
Employees fund their accounts with pre-tax dollars.
Employees can contribute to a TSP as well as to an individual retirement account (IRA)
From an employer’s view, a SEP is far ______ to set up and maintain.
These employer contributions into an employee’s SEP are ____ included in the employee’s gross income.
All employees must be included in the plan if they
- are age ___ or older;
- have worked for three of the last ____ years with the employer; and
- earned at least $____ yearly from the employer.
The annual amount that an employer can contribute to a person’s SEP is limited to either ___ % of the employee’s compensation or $ _______ (2018), whichever is less.
SEP plans ________ require that employers make regular contributions every year.
SEP plans _______ accept employee contributions.
From an employer’s view, a SEP is far easier to set up and maintain.
These contributions into an employee’s SEP are not included in the employee’s gross income.
And, the contributions cannot discriminate in favor of highly compensated employees.
All employees must be included in the plan if they
- are age 21 or older;
- have worked for three of the last 5 years with the employer; and
- earned at least $550 yearly from the employer.
The annual amount that an employer can contribute to a person’s SEP is limited to either 25% of the employee’s compensation or $55,000 (2018), whichever is less. (The limit is subject to adjustment every year.)
Because of the lowered costs (administrative, reporting, and compliance), smaller employers often use SEP plans.
SEP plans do not require that employers make regular contributions every year. SEP plans do not accept employee contributions.
Salary-Reduction SEP (Simplified Employee Pension) Plans are reserved for employers of what size?
Can you still set up SAR SEPs?
A key difference between a SAR-SEP and a regular SEP is that unlike SEPs, SAR-SEPs permit employee ____________ (in the form of ________ ______ ).
Reserved for employers with 25 or fewer employees, a SAR-SEP (salary-reduction SEP) is a variation of a SEP plan.
New SAR-SEPs have not been permitted since 1997, but those in existence at that time were allowed to continue.
A key difference between a SAR-SEP and a regular SEP is that unlike SEPs, SAR-SEPs permit employee contributions (in the form of salary reduction).
The SAR-SEP was replaced with the _______ ______ _____ _____ for Employees, or SIMPLE, plan.
Designed solely for _____ businesses, with no more than ____ people and that do not already have a qualified plan in place.
SIMPLE plans can be set up as a ______ plan, or they can be set up as individual _____ for each participating employee.
In 2018, the maximum deferral amount is $_______, with an additional $_______ for those who are at least 50 years old.
The employer then makes a matching dollar-for-dollar contribution, up to ___ percent of the employee’s annual compensation.
A SIMPLE plan may call for “____________ _______________,” in which case, employees are not required to make elective deferrals. In this case the employer must contribute ____ percent of compensation for each eligible employee.
The SAR-SEP was replaced with the Savings Incentive Match Plan for Employees, or SIMPLE, plan.
Designed solely for small businesses, with no more than 100 people and that do not already have a qualified plan in place.
- SIMPLE plans encourage employers to set up a retirement plan by easing the burden of compliance requirements that a qualified plan normally has to meet.
- SIMPLE plans also encourage employees to participate in the plan by providing tax incentives for doing so.
SIMPLE plans can be set up as a 401(k) plan, or they can be set up as individual IRAs for each participating employee.
In 2018, the maximum deferral amount is $12,500, with an additional $3,000 for those who are at least 50 years old.
The employer then makes a matching dollar-for-dollar contribution, up to 3 percent of the employee’s annual compensation.
For example, let’s say Rusty decides to participate in his employer’s SIMPLE 401(k) plan, electing to defer $5,000 to the plan (10 percent of his $50,000 annual salary). His employer must match Rusty’s contribution up to a maximum 3 percent of his compensation, or $1,500. This matching contribution is added to Rusty’s SIMPLE account.
A SIMPLE plan may call for “nonelective contributions,” in which case, employees are not required to make elective deferrals. In this case the employer must contribute 2 percent of compensation for each eligible employee.
Keogh Plans did not allow who to participate?
Self-employed people were in the same position. The ______ __________ ________ Act, signed into law in 1962, solved this problem by creating the ______ plan.
Also known as an _______ plan, a Keogh plan is a qualified retirement plan designed for ____________ businesses (sole proprietorships and partnerships).
Many years ago, the tax laws that governed qualified plans benefited employees more than small business owners.
For example, many small business owners could set up plans for the benefit of their employees, but the owners themselves could not participate because they were not considered employees.
Self-employed people were in the same position. The Self-Employed Individuals Retirement Act, signed into law in 1962, solved this problem by creating the Keogh plan.
Also known as an HR-10 plan, a Keogh plan is a qualified retirement plan designed for unincorporated businesses (sole proprietorships and partnerships).
An ___________________ (ESOP) is a tax-qualified, defined contribution employee benefit plan through which an employer enables its employees to buy _______ of ownership in the employer at reduced prices.
In general, all ____________ employees with at least ____ year of service can participate in the plan.
An employee stock ownership plan (ESOP) is a tax-qualified, defined contribution employee benefit plan through which an employer enables its employees to buy shares of ownership in the employer at reduced prices.
In general, all full-time employees with at least one year of service can participate in the plan.
