Qualified Plan Rules and Options

Question 1

Age and Service

Answer 1

21 and 1

Max req is 21 and have 1 year service

If choose 2 year requirement-employee is immediately vested

Must be able to participate earlier of:
-1st day of the plan year beginning after the date age and service is met

-or 6 months after age and service is met

1000 hours and 12 months of service = 1 year

Question 2

Coverage Requirements

Answer 2

Ratio % Test -must cover % of non highly compensated employees that is 70% of HCE’s if fails them must pass next… (can exclude 30% NHCE if cover 100% of HCE) Excluded must be separate class of employees.

Example: Excludes 10% of HCE 90% x 70% = 63%
63%-100% = 37% NHCE can be excluded

Average Benefit test - average benefit of NHCE must be at least 70% highly compensated employees

DON”T CONFUSE HCE WITH KEY EMPLOYEE

Question 3

Minimum Participation

Answer 3

DB only

must benefit the lesser of:

1. 50 employees
2. the greater of
   - 40% employees
   - 2 employees (one if only 1 employee)

Question 4

Highly Compensated Employee

Answer 4

HCE
Greater than 5% owner
Employee earning in excess of $120k previous year (2015)

Question 5

Key Employee

Answer 5

only effects top heavy plans
any time during the year has been:
active employee
-greater then 5% owner
-officer and greater than $170k in comp
-greater than 1% owner and over $150comp

Question 6

Top Heavy Plan

Answer 6

more than 60% of aggregate accrued benefits or account balances are allocated to key employees.

Must use a faster vesting schedule

Question 7

Vesting schedules

Answer 7

TOP Heavy DB and all DC

3 year cliff
2-6 year graded (0, 20, 40, 60, 80, 100)
100% vested with 2 year eligibility

Non Top Heavy DB
5 year cliff
3-7 year graded (most stringent vesting schedule)
100% 2 year eligibility (most stringent service requirement)

participant deferrals are always vested!

Question 8

Attribution Rules

Answer 8

related to >5% owner

employee
spouse
parent
child
grandparent

is also a >5% owner
(only a parent, not a grandparent is deemed to own stock for a child under 21)

Question 9

ADP/ACP testing

Answer 9

ESOP 401k and matched 403B SarSEP

Elective Deferrals are subject to nondiscrimination testing under ADP test.

Employer matching, profit sharing, subject to non discrimination testing under ACP

Both compare HCE to NHCE

HCE rate must be:

1. not more than 125% of the NHCE rate (ADP >8%)
2. not more than 200% of the NHCE rate and not more than 2% greater than the NHCE rate (ADP 1%-8%)

Question 10

Short Hand Method

Answer 10

0-2% is times 2
2-8% is plus 2

                            NHCE                    HCE

Deferral 1% X2 2%
2% +2 or x2 4%
3%-8 +2% 5%
REMEMBER! $265,000 MAX

Question 11

Controlled Groups

Answer 11

Parent- Subsidiary 1 entity owns 80% or more of other entities

Brother- Sister - 5 or fewer owners of 2 or more entities own 80% or more of each entity

Affiliated Service Group - professional service organization (health, law, engineering, accounting) open separate group

Employee Leasing - leased employees from an independent leasing organization rather than employ directly

Annual additions are limited to 100% of comp or $53000
Individual with multiple accounts applies limits:
in aggregate
separately to each unrelated employer

Question 12

Integration/ Disparity

Answer 12

Qualified plans may be integrated with Social Security to balance the benefit bias toward lower paid employees that is inherent in the Social Security system. Integration allows the employer’s retirement plan to be combined with Social Security to result in an overall retirement scheme. Under an integrated plan, greater contributions or benefits are provided for higher paid employees whose compensation exceeds than the Social Security wage base.

The “permitted disparity” places a limit on the allowed difference between either benefit accruals or contributions for highly paid employees vs. lower paid ones.

A. Defined benefit plans
An integrated defined benefit plan must be based on average annual compensation, defined as an average of at least three years’ consecutive pay.

Two methods to integrate defined benefit plans with Social Security:

Excess method - Plan provides a higher level of benefits for compensation above what is called the “integration level.” The integration level typically is what is known as the Social Security covered compensation, which is the average Social Security wage base for the 35 years up to and including the employee’s Social Security retirement year.
Offset method - Plan formula reduced by fixed or formula amount designed to take into account Social Security benefits.
B. Defined contribution plans
Defined contribution plans may utilize only the excess method to integrate with Social Security.

Question 13

Excess Method ALL DC PLANS

Answer 13

Plan defines level of compensation called integration level, Plan provides higher rate of contributions or benefits for compensation above this level. integration level usually SS taxable wage base. Used in DB or DC plans

Higher contributions above the integration level than below

• limited to lesser of
  - 2X base% or
  - base + 5.7% (use this above 5%)

Question 14

Offset Method

Answer 14

formula approximates existence of SS benefits reducing employer’s contributions on behalf of non-HCEs, Used in DB plans only