Types of Retirement Plans Flashcards
1
Q
Qualified Plans
A
- must meet ERISA requirements regarding eligibility, coverage, vesting, funding, communication with employees, and other areas
- they are subject to the most stringent regulations and receive the most favorable tax treatment
2
Q
Characteristics of Qualified Plans
A
- Discrimination is prohibited
- ERISA rules generally apply
- limits on benefits apply, and compensation that can be considered is limited to $270,000
- coverage, participation, and vesting rules apply
- employer contributions are deductible in the current year
- earnings on assets are income tax deferred
- benefits are protected from creditors of the employer or employee
- rollover to an IRA or qualified plan is available
3
Q
Characteristics of Non-Qualified Plans
A
- discrimination is allowed
- ERISA rules do not apply
- no limits on benefits or on compensation
- coverage, participation, and vesting rules do not apply
- employer takes deduction in the year employee receives income
- earnings on assets are taxable to employer
- employee has income unless the plan is unfunded or the employee has a substantial risk of forfeiture
- benefits are subject to the employer’s creditors, and when nonforfeitable, benefits are subject to the employee’s creditors
- non rollover is available, so benefits are not portable.
4
Q
Types of Profit-Sharing Plans
A
- Profit sharing plan
- 401k
- SIMPLE 401k
- Age Based Plan
- Stock Bonus Plan
- ESOP
- New Comparability Plan
- Thrift Savings Plan
5
Q
Types of Pension Plans
A
- Defined Benefit
- Cash Balance
- 412(i)
- Money Purchase
- Target Benefit
6
Q
Types of Defined Contribution Plans
A
- Profit sharing plan
- 401k
- SIMPLE 401k
- Age Based Plan
- Stock Bonus Plan
- ESOP
- New Comparability Plan
- Thrift Savings Plan
- Money Purchase Pension Plan
- Target Benefit Pension Plan
7
Q
Money-Purchase Plans
A
- the employer is required to contribute on behalf of each eligible employee, in an amount determined by the contribution formula stipulated in the plan.
- an employer may deduct contributions up to 25% of the participant payroll
- they are subject to minimum funding standards, therefore a contribution must be made regardless of whether the employer was profitable in that year or not.
- forfeitures by employees who leave before they are vested can reduce the employers contributions
- no more than the lesser of 100% of compensation or $54,000 may be allocated to the account of any one participant during the plan year.
8
Q
Target Benefit Plan
A
- an age-weighted money purchase plan
- contributions use actuarial computations that factor in both the participants age and compensation
- older employees accumulate funds faster
- the retirement benefit is not guaranteed
- an employer may deduct contributions up to 25% of the participant payroll
- no more than the lesser of 100% of compensation or $54,000 may be allocated to the account of any one participant during the plan year.
9
Q
Profit Sharing Plans
A
- the employer has flexibility when it comes to making contributions and in some years can make no contributions.
- the IRS requires only that the contributions be “substantial and recurring”
- amount allocated is based upon compensation as a percentage
- employer contributions are tax deductible up to a maximum of 25% of participant payroll
10
Q
401k Plans
A
- also called “cash of deferred arrangement” (CODA)
- employees can defer salary to be contributed to their individual retirement accounts
- employee contributions are 100% vested at all times.
- employer contributions must vest under a 2 to 6 year graded vesting schedule or a 3-year cliff schedule.
- employer contributions are tax deductible up to a maximum of 25% of participant payroll
11
Q
Roth 401k
A
-are subject to required minimum distribution rules.
12
Q
SIMPLE 401k Plans
A
- the employer must make dollar-for-dollar matching contributions on the first 3% of deferred salary or make 2% non-elective contribution for all eligible employees
- employees are 100% vested in any contributions made
- exempt from non-discriminatory testing and top-heavy rules.
- maximum salary deferral is $12,500, with a catch up of $3,000 if over 50.
- the employer cannot have more than 100 employees to sponsor this plan
- only employees who earn $5,000 a year are eligible to participate
13
Q
Safe Harbor 401k Plans
A
- require either 100% matching contribution on the first 3% and 50% matching on the next 2% of salary deferra or a nonelective contribution of 3% of compensation for all eligible employees
- employees are 100% vested in any contributions made
- exempt from non-discriminatory testing and top-heavy rules.
- employees can defer $18,000
14
Q
Stock Bonus Plans
A
- a type of profit-sharing plan in which employer discretionary contributions are made in the form of the company’s stock, or cash contributions are used to buy shares of the company stock.
- S corps can have a stock bonus plan or ESOP, but self-employed and partnerships cannot.
15
Q
ESOP
A
- a stock bonus plan that can borrow money to take advantage of leverage
- the loan that is used for leverage can be used as a write off for the employer (major advantage)
