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CFP Retirement & Income Planning > Qualifed Plans > Flashcards

Qualifed Plans Flashcards

1
Q

Defined Benefit Plans: Pension Plans

A

Defined Benefit Pension Plans

Cash Balance Pension Plans

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2
Q

Defined Contribution Plans: Pension Plans

A

Money Purchase Pensions

Target Benefit Pensions

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3
Q

Are ALL Profit Sharing Plans Defined Benefit or Defined Contribution plans?

A

ALL Profit sharing plans are Defined Contribution Plans

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4
Q

Profit Sharing Plans

A

Profit Sharing Plans

Stock Bonus Plans

ESOPs

401k Plans

Thrift Plans

New Comparability Plans

Age-Based Profit sharing plans

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5
Q

Pension Plan Characteristic:

A

Legal Promise of the plan

Paying a pension at retirement

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6
Q

Pension Plan Characteristic: In-Service Withdrawals?

A

YES, if age 59 1/2 or older

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7
Q

Pension Plan Characteristic: Mandatory Funding?

A

YES

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8
Q

Pension Plan Characteristic: Investment in Employer Securities?

A

Up to 10% of employer securities

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9
Q

Pension Plan Characteristic: QJSA & QPSA? (Qualified Joint Survivor Annuity & Qualified Pre-retirement Survivor Annuity)

A

YES

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10
Q

Profit Sharing Plan Characteristic: Legal Promise of Plan?

A

Deferral of Compensation

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11
Q

Profit Sharing Plan Characteristic: In-Service Withdrawals?

A

YES (after TWO years)

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12
Q

Profit Sharing Plan Characteristic: Mandatory Funding?

A

NO; up to employee to fund it

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13
Q

Profit Sharing Plan Characteristic: Investment in Employer Securities?

A

Up to 100% can be invested in employer securities

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14
Q

Profit Sharing Plan Characteristic: QJSA & QPSA?

A

NO

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15
Q

Defined Benefit Characteristics: Annual Contribution Limit?

A

Not less than the unfunded current liability for years 2006 - 2007

Starting in 2008, DB plans are subject to new annual contribution limits under PPA 2006

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16
Q

Defined Benefit Characteristics: Who assumes investment risk?

A

Employer

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17
Q

Defined Benefit Characteristics: How are Forfeitures allocated?

A

Reduce Plan Costs

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18
Q

Defined Contribution Characteristics: What’s the annual contribution limit?

A

25% of covered compensation

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19
Q

Defined Contribution Characteristics: Who assumes investment risk?

A

Employee

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20
Q

Defined Contribution Characteristics: How are Forfeitures allocated?

A

Reduce plan costs

Or

Allocate to other participants

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21
Q

Defined Contribution Characteristics: Is it subject to Pension Benefit Guaranty Corporation Coverage (PBGC)?

A

No

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22
Q

Defined Contribution Characteristics: Does it have separate investment accounts?

A

YES, they’re usually separate. participants have account balances

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23
Q

Defined Contribution Characteristics: Can credit be given for prior service?

A

No

24
Q

Defined Benefit Characteristics: Is it subject to PBGC coverage?

A

Yes
(except professional firms with less than 25 employees)

25
Q

Defined Benefit Characteristics: Does it have separate investment accounts?

A

NO,

They’re commingled.

Participants have accrued benefits

26
Q

Defined Benefit Characteristics: Can credit be given for prior service?

A

Yes

27
Q

Advantages of Qualified Plans

A

Payroll taxes avoided on ER Contributions (not for EE elective deferrals though)

Tax deferral of earnings & Income

ERISA Protection
- Anti Alienation: prohibits any action that may cause plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings.
- Protection from Employers

28
Q

Qualified Plans Advantages: Special Tax Options for Lump Sum distributions?

A

Net Unrealized Appreciation (NUA)

29
Q

Qualified Plans Qualification Requirements: Plan Document

A

Must be in writing by end of tax year

Funding doesn’t have to occur until tax return filing plus extension

30
Q

Qualified Plans Qualification Requirements: Eligibility

A

21 years old & 1 year of service (1,000 hours worked during one plan year)

Or

2 years of service w/ 100% vesting (doesn’t apply to 401k plans)

Tax-Exempt educational institutions can require age 26

Plan entrance date: Must have at least 2 per year

31
Q

Qualified Plans DC Plan: Vesting

A

Noncontributory:
2 to 6 years graduated

Or

3 year cliff

Deferral (contributory)
- 100% Vested

32
Q

Qualified Plans Qualification Requirements: Special Qualification Requirements apply to?

A

Top-Heavy Plans

Cash or Deferred Arrangements (CODAs)
(2 to 6 years graduated or 3 year cliff)

33
Q

Qualified Plans Qualification Requirements: Eligibility for Long Term PT Employees

A

For plan years beginning after December 31, 2020

401k must allow Long-Term PT EE’s to participate in 401k (SECURE ACT) upon completion of:

  • 500 hours per year
  • 3 continuous years
    • Years completed after 2020 will count
    • Eligibility would begin in 2024 (after completion of 3 continuous years)
34
Q

Qualified Plans Qualification Requirements: Coverage Tests can EXCLUDE?

A

Ineligible EE’s (don’t meet the 21 & 1 Rule)

EE’s covered under collective bargaining agreement (Union)

Nonresident alien EE’s that do NOT do services in US

Part-time EE’s not meeting eligibility under SECURE ACT

35
Q

Qualified Plans Coverage Tests: Nondiscriminatory or not?

A

Must be Nondiscriminatory

36
Q

Qualified Plans Coverage Tests: Safe Harbor Test

A

Greater than or equal to 70% of NHC Covered

37
Q

Qualified Plans Coverage Tests: Ratio % Test

A

(% of NHC Covered / % of HC covered)

Result must be greater than or equal to 70%

38
Q

Qualified Plans Coverage Tests: Average Benefits Test

A

AB% of NHC / AB% of HC

AND Nondiscriminatory Test must be greater than or equal to 70%

39
Q

Highly Compensated EE Defined as?

A

Either:

Any owner of >5% this year or last year

Or

Comp in excess of $150k for prior year
- unless employer elects to consider top 20% of EEs as ranked by salary

40
Q

DB Plans must additionally pass what coverage test?

A

50/40 Test

41
Q

DB Plans: 50/40 Test Defined

A

Plan must cover lesser of:
- 50 employees
- 40% of employees

42
Q

Company has 100 eligible EE’s & sponsors a DB Pension Plan. What’s the minimum number of EE’s that must be covered by the plan to conform with ERISA?

A

50/40 Rule

Lesser of 50 or 40% of EE’s

= 40

43
Q

Qualified Plan DB: Vesting

A

3-7 year graduated

Or

5 year cliff

ER can always be more generous

44
Q

Top-Heavy Plan

A

DC: > 60% of account balance attributable to key EE’s

DB: >60% of accrued benefits attributable to key EE’s

45
Q

Key Employee Definition

A

> 5% owner

Or

> 1% owner w/ comp excess of $150,000

Or

Officer w/ comp excess $215,000

46
Q

Top Heavy Plan: How it affects Funding and vesting for DC Plans?

A

DC: EE gets contribution made on their behalf equal to at least 3% of EE’s comp
- except if key EE’s contribution is less than 3%

47
Q

Top Heavy Plan: How it affects Funding and vesting for DB Plans?

A

Non-Key EE gets benefit equal to 2% per years of service (limit 20%) times EE’s average annual comp.

Must also increase vesting to either 2-6 graduated or 3 yr cliff

48
Q

Top Heavy DB: James has 10 years of service & average comp of $100k. What’s the mandatory ER benefit?

A

$100k x 2% x 10= $20,000

49
Q

DC Plan Contribution Limits

A

$66,000 (2023)
Consists of ER, EE, & any forfeitures allocated

$66,000 + $7,500 (catch up) = $73,500

50
Q

Mary age 29 earns $200k/year and has 401k. Her company made a 20% contribution to all EE’s and allocates $6,000 of forfeitures to her profit sharing plan. What’s the max Mary can contribute to 401k plan?

A

$200k x 20% = $40k

$40k + $6k= $46k ER

$66k (max) - $46k =
$20k she can defer

51
Q

Pension Plans Actuary

A

Determines plan funding range
Assumptions

Required Annually:
- DB Pension Plan
- Cash Balance pension plan

Required at Inception:
- Target Benefit Pension

No other plans require an actuary

52
Q

Pension Plan SS Integration: Excess Method

A

Provides excess benefit to participants whose earnings are in excess of the SS wage base

Used by both DB and DC plans

53
Q

Pension Plan SS Integration: Offset Method

A

Reduces benefit to EE’s whose earnings are below the SS wage base

Only used by DB plans

54
Q

Cash Balance Pension Plan Characteristics

A

DB Plan

Mandatory Funding

Benefit based on an annual guaranteed contribution rate & guaranteed earnings on the contributions.

Quasi-Separate Accounts
- Participants see hypothetical account with hypothetical earnings
- Actuarially determined

Favors Younger plan entrants

Uses 3 year cliff

55
Q

Money purchase plan

A

DC Pension plan

Mandatory annual funding of fixed % of total employer covered up to 25%

Participant bears invest risk

Separate accts

Favors younger entrants

56
Q

Target Benefit Pension Plan

A

Special type of Money Purchase Pension

Determines contribution based on participant age

Participant bears investment risk

Favors older entrants

Need actuary at inception of plan

CFP Retirement & Income Planning (4 decks)

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