Types Of Retirement Plans

Question 0

Types of qualified profit-sharing plans?

Answer 0

Traditional profit-sharing plans
Stock bonus plans
ESOPs
Section 401(k) plans
Thrift plans
Simple 401(k)
Age-based profit-sharing plans
New comparability plans

Question 1

Types of qualified pension plans?

Answer 1

Defined benefit plan
Cash balance plan
Target benefit plan
Money purchase plans
DB(k) plans

Question 2

Types of other tax-advantaged plans?

Answer 2

SEP plans
SARSEP plans
Traditional IRAS
Roth IRAs
SIMPLE IRAs
Section 403(b) plans

Question 3

Types of non-qualified plans?

Answer 3

Section 457
Nonqualified deferred compensation
Nonqualified stock option 
Incentive stock option
Phantom stock 
Restricted stock
Employee stock purchase plans (ESPP)
Junior class shares
Stock appreciation rights (SARs)

Question 4

What are the ERISA requirements for qualified plans?

Answer 4

Coverage
Participation
Vesting
Reporting and disclosure
Fiduciary requirements

Question 5

How are qualified retirement plans tax advantaged?

Answer 5

Employer receives immediate deductibility of all contributions and the employee is not taxed on contributions unless a distribution occurs.

Question 6

What are the attributes of nonqualified plans?

Answer 6

Discriminate in favor of select employees
Not subject to ERISA requirements
Postponed employer deduction and possible employee deferral of tax
Funding is not required and informal is possible
Distributions are taxed as ordinary income; may be taxed before actual receipt of funds

Question 7

What are the characteristics of a pension plan?

Answer 7

Employer’s promise to pay a benefit or make a contribution
Mandatory annual funding
In-service withdrawals from certain pension plans are permitted for employees age 62 and over

Question 8

What are the characteristics of a profit-sharing plan?

Answer 8

The promise to defer taxes
In-service withdrawals are allowed if the plan document permits
Does not require mandatory annual funding, although to remain qualified, the plan must make substantial and recurring contributions
Employer has a deductible contribution limit of 25%

Question 9

What are the general characteristics of a defined benefit plan?

Answer 9

Commingled account
investment risk is borne by the employer
Defines the benefit the participant will receive at normal retirement
Subject to benefit limits

Question 10

What are the general characteristics of a defined contribution plan?

Answer 10

Individual accounts
Investment risk is borne by the employee
Defines the contribution formula to be made by the employer for the benefit of the participant
Subject to contribution limits for employees and employers

Question 11

What are the best plans to provide a savings medium that employees perceive as valuable?

Answer 11

ESOP/stock bonus plan
Money purchase pension plan
Profit-sharing plan
Thrift plan
Section 401(k) plan
Simplified employee pension (SEP) plan
Target benefit pension plan

Question 12

Why are defined benefit plans the best vehicle to provide adequate replacement income for each employee’s retirement?

Answer 12

It can provide a benefit based on final average compensation, regardless of the employee’s years of service
there is no investment risk assumed by the employee
Employer funding of the benefit is mandatory, subject to underfunding penalties, even if the employer’s profits decline

Question 13

Which plans weight the allocation of plan contributions to older employees

Answer 13

Defined benefit plans

Age-based profit-sharing plans and target benefit plans are designed to steer benefits towards older employees

Question 14

which plans create an incentive for employees to maximize performance of the company?

Answer 14

Profit-sharing plan

ESOP/stock bonus plan

Question 15

Which plans minimize turnover?

Answer 15

Defined benefit plans that use a graduated vesting schedule

Question 16

Which plans encourage early retirement?

Answer 16

A defined benefit plan that allows benefits to fully accrue after a specified period

Question 17

Which plans provide the employer with maximum contribution flexibility?

Answer 17

Traditional profit-sharing plans from a contribution standpoint and SEP plans as amounts contributed each year can be entirely at the employer’s discretion.

Question 18

What are the requirements for a qualified plan?

Answer 18

Must be in writing
Summary plan description must be communicated to employees
Must be permanent
Must not allow or have prohibited transactions
Must include the four elements of a qualified plan
Must cover a broad group of people and not just key employees
Must meet ERIS requirements which are enforced by the department of labor

Question 19

What are the four elements of a qualified plan?

Answer 19

The plan document provides the terms and benefit amounts provided by the plan
The plan is recognized as a separate legal entity
The trust holds the plan assets and the trustee is typically selected by the employer
The funds become the plan funds and cannot be returned to the employer

Question 20

What are the eligibility requirements of a qualified plan?

Answer 20

Age 21 and the employee completes 1 year of service (1000 hours)
The service requirement can be extended to 2 years if the plan provides imediate 100% vesting of employer contributions upon entry
Section 401(k) plans may not use the 2 year requirement - this includes all plans containing a Section 401(k) arrangement

Question 21

Who may be excluded from a qualified retirement plan?

Answer 21

Union employee whose retirement benefits were negotiated in a separate agreement
Nonresident alien employees who have received no US wages or compensation

Question 22

What are the requirements for plan entrance dates?

Answer 22

Once an employee has met the eligibility requirements, plan entry occurs on the next available entrance date – but employees can not be made to wait more than 6 months.

Question 23

What are the coverage test rules?

Answer 23

Then employer must cover at least 70% of all nonexcludable, nonhighly compensated employeess (safe harbor test)
Plans that do not meet the safe harbor test must meet one of two exceptions.

Question 24

Who is a highly compensated employee?

Answer 24

Meets one of the following criteria;
Was a 5% owner of the employer at any time during the current or preceding year
For the preceding year, had compensation greater than $115,000 from the employer

Question 25

What is the 50/40 test?

Answer 25

All defined benefit plans require coverage on each day of the plan year for the lesser of 50 employees or 40% or more of all nonexcludable employees.
In addition, defined benefit plans also must meet one of the safe harbor, ratio % or average benfits % test

Question 26

What is a top heavy plan?

Answer 26

A top heavy plan provides more than 60% of its benefits to key employees. If TH, the plan must provide more rapid vesting than generally required. A top heavy defined benefit plan must provide a minimum benefit accrual of 2% multiplied by the number of years of service up to 20%. A top heavy defined contribution plan must contribute 3% of the total compensation. If the contribution for key employees is less than 3%, the contribution to non-key employees can be equal to the contribution for key employees.

Question 27

What is a key employee?

Answer 27

An officer with compensation in excess of $165,000
A greater than 5% owner
A greater than 1% owner with compensation greater than $150,000
The number of officers that may be considered key employees is limited to the lesser of 50 employees; or the greater of three employees or 10% of all employees.

Question 28

When is integration with S.S. permitted?

Answer 28

Defined contribution plans can be integrated with S.S. using only the excess method

Question 29

What are the requirements for vesting under defined benefit plans?

Answer 29

A five-year cliff vesting –no vesting is required before five years of service; 100% vesting is required after five years of service
3-7 year graduated vesting – the plan must provide vesting that is at least as fast as 3 - 20%, 4-40%, 5-60%, 6-80%, 7-100%
Cash balance plans require three-year cliff vesting

Question 30

What are the requirements for vesting under a defined contribution plan?

Answer 30

Three year cliff vesting; 100% vested after three years of service
2-6 year graduated vesting

Question 31

Under what circumstances is an employee automatically 100% vested?

Answer 31

Plan termination
SEP plan, SARSEP plans, and SIMPLE
Attainment of a normal retirement age
Under Section 401(k) plan, elective deferrals, qualified nonelective contributions, and qualified matching contribution are 100% vested at all times.
Safe-harbor contributions to a safe harbor Section 401(k) plan
Plan requires two years of service for eligibility

Question 32

What are the defined benefit limits?

Answer 32

100% of the participant’s compensation averaged over the three highest consecutive years of compensation
$205,000 (max benefit amount for 2013)

Question 33

What are the defined contribution limits?

Answer 33

The annual additional limits cannot exceed the lesser of the following;
100% of the participant’s annual compensation
$51,000 (for 2013) – includes everything employer/employee, but not catch-up contributions

Question 34

What is the compensation limit for qualified plans?

Answer 34

Covered compensation is capped at $255,000 for 2013

Question 35

Which plans typically have loan provisions?

Answer 35

Section 403(b) and Section 401(k) plans
All loans must be repaid in five years and include interest unless to purchase a residence - then the lending period must be reasonable.  Loans must be available to everyone. Loans are generally limited to 1/2 PV of accrued benefit or bested account balance and cannot exceed $50,000

Question 36

What are the disadvantages of a defined benefit plan?

Answer 36

High administrative costs to set-up and maintain.
Employees who leave before retirement may receive little value
Employer assumes risk of investment
Require costly annual actuarial work

Question 37

What are PBGC Premiums?

Answer 37

Covers plans that terminate without sufficient funds to pay. The premiums are paid by the sponsor of the plan and include a base premium paid by all employers and a variable premium with no overall maximum. The PBGC may not cover all plan benefits and does not cover benefits added to the plan less than five years before a distress termination.

Question 38

What is a DB(k) plan?

Answer 38

Designed to address the potential shortfalls in Section 401(k) plans and a decline in the establishment of defined benefit plans.
For plan years befinning in the year 2010, a traditional defined benefit plan will be permitted to accept Section 401(k)-type (pre-tax employee contributions.
A Sponsoring employer with no more than 500 employees may offer the DB(k) plan
The 401(k) component must include an automatic enrollment feature and fully vested 50% match on the first 4% of compensation deferred by an employee.
Guarantees monthly income at retirement
Encourages employers without a pension play to establish one
Combines the security employees get through traditional defined benefit plans with the individual investment control
Benefit to employers - exemption from the top-heavy rules, allows small employers to sponsor a defined benefit plan with predictable costs adn lower premiums because of the Section 401(k) matching, minimal reporting requirements