ADP/ACP Testing Flashcards
(27 cards)
What are the subtypes of Pension Plans?
Defined Benefit Pension: provides employees with a guaranteed retirement benefit based on a formula that considers factors such as salary history and years of service.
Cash Balance Pension: maintains individual accounts for each employee. The employer credits a fixed annual contribution and investment earnings, which grow over time.
What are the subtypes of Defined Contribution Plans
Money Purchase Pension: employers make fixed contributions based on employee salaries
Target Benefit Pension: designed to achieve a predetermined retirement benefit, with contributions based on actuarial assumptions.
WHat are the subtypes of profit sharing plans?
Profit Sharing, Stock Bonus, ESOPs, 401(k), Thrift, New Comparability, Age-Based Profit Sharing
What is defined benefit plan?
The employer promises a specific retirement benefit and thus bears the investment risk.
What is a defined contribution plan?
Contributions are defined, and the benefit depends on the investment performance of the chosen investment vehicle of the employee. Thus the employee bears the investment risk.
Name three categories of employees that can be excluded from coverage testing.
Ineligible (age/service), under collective bargaining, nonresident aliens not in the U.S.
What is the minimum percentage of non-highly compensated employees (NHCs) that must be covered under the Safe Harbor test?
At least 70%
How is the Ratio Percentage test calculated?
(% NHC covered / % HC covered) must be at least 70%
What is the Average Benefits test requirement?
(Avg. benefit % for NHC / Avg. benefit % % for HC) must be at least 70% and pass the nondiscriminatory test
A qualified plan must pass at least one of what three tests?
Safe Harbor, Ratio Percentage, Average Benefits
What is the 50/40 test for defined benefit plans?
The plan must cover the lesser of 50 employees or 40% of all employees each day of the year.
What is the ADP test?
Actual Deferral Percentage test limits elective deferrals by HCs based on NHCs’ deferrals.
What are highly compensated employees (HCEs)?
Earned >$155,000 in 2024, or
Own >5% of the company
What are non-Highly Compensated Employees (NHCEs)?
All other employees not meeting HCE criteria
What is an elective deferral?
The amount of your salary that you choose to have withheld from your paycheck and contributed directly into an employer-sponsored retirement plan.
What is the ACP test?
Actual Contribution Percentage test includes after-tax and employer matching contributions; uses same limits and corrections as ADP
What is the max HC ADP if NHC ADP is 2% or less?
2 × NHC ADP
What is the max HC ADP if NHC ADP is between 2% and 8%?
NHC ADP + 2%
What is the max HC ADP if NHC ADP is over 8%?
1.25 × NHC ADP
Name two corrective actions for failing ADP/ACP tests.
Corrective distributions (refund excess to HCs), QNEC (employer contributes to all NHCs, 100% vested)
What is recharacterization?
Changing excess pre-tax contributions to after-tax (thrift)
What is a Qualified Non-Elective Contribution (QNEC)?
Employer contributes to all eligible NHCs and it is immediately 100% vested.
What are Qualified Matching Contributions (QMC)?
Employer matches only for NHCs who deferred, and the match is immediately 100% vested.
What contributions exempt a 401(k) from ADP/ACP testing?
3% nonelective to all, or 100% match up to 3%+50% of the next 2% (max 5%)
