Bryant - Course 5. Retirement Planning & Employee Benefits. 2. Qualified Retirement Plans Flashcards

Question

Describe Employer Matching Contributions

Answer 1

Employer matching contributions are contributions made by an employer on account of: * **An employee contribution or elective deferral**, or * Forfeiture allocated on the basis of employee contributions, matching contributions or elective deferrals. Employer matching contributions must vest under the faster vesting schedule that is at least as favorable as one of the following two standards: * **Three-Year Cliff Vesting**: A plan's vesting schedule satisfies this minimum requirement if an employee with **at least three years of service is 100% vested**. No vesting at all is required before three years of service. * **Two- to Six-Year Graded Vesting**: The plan must provide vesting that is at least as fast as the following schedule: Years of Service Vested Percentage 2 20% 3 40% 4 60% 5 80% 6 or more 100% This faster vesting schedule is also applicable to all employer contributions in Defined Contribution plans. **Please keep in mind that employers can always provide a more generous vesting schedule, which means that the employee will be vested sooner**.

Answer 2

60% * After Jamel has attained 4 years of service his vesting will be 60% of employer matching contributions.

Answer 3

Employer and employee contributions to a qualified plan **must be deposited into an irrevocable trust fund or insurance contract that is for the exclusive benefit of plan participants and their beneficiaries**. * **Pension Plans are subject to certain funding requirements that will compel the employer to provide either a contribution or the accrual of a benefit each year**. * **Profit Sharing plans** are subject to the less restrictive **"substantial and recurring" benchmark.** **Pension plans, both defined benefit and defined contribution, must meet their annual funding requirements or be subject to a penalty and/or plan disqualification**. * Profit sharing plans are not subject to the same standards. Profit Sharing plan contributions must be recurring and substantial or the IRS can deem the plan to be terminated. * Substantial and recurring is not clearly defined in the law so that there is always some risk in repeatedly omitting contributions. The funding requirements for defined contribution pension plans is based on the contribution amount outlined in the plan documents. **For defined benefit pension plans, the minimum funding is more complicated. The Pension Protection Act of 2006, changed the methodology for determining minimum funding in defined benefits plans**. The details will be discussed later.

Answer 4

**An actuarial cost method determines the employer's annual cost for a defined benefit plan**. * Actuaries use a number of different actuarial cost methods that are relatively complex mathematically. However, these methods are based on simple principles that should be understood by financial planners even though the computational complexities are left to the actuary. * **An actuarial cost method develops a series of annual deposits to the plan fund that will grow to the point where as each employee retires the fund is sufficient to fully fund the employee's retirement benefit**. If a defined benefit plan provides past service benefits, the cost of these can be made part of the annual cost. Alternatively, the past service benefit can be funded separately by developing what is known as an **unfunded past service liability or a supplemental liability**. * **The supplemental liability is paid off through deposits to the plan fund over a fixed period of years, up to 30, regardless of actual retirement dates for employees**. The use of a supplemental liability can provide additional funding flexibility in many cases. **The Pension Protection Act of 2006 has completely changed the funding rules for Defined Benefit Plans**. * **PPA-06 requires plans to establish a "funding target" which can be thought of as 100% of the present value of the accrued benefit's of the plan at the beginning of a year**. * **Next, the plan's "Target Normal Cost", benefits accrued during the plan year by participants, is factored in**. If the value of the plan's actual assets are less than the funding target, the **required contribution to the plan must bring the plan assets up to the sum of the funding target and the target normal cost**. In other words, the plan assets must equal the accrued benefits that the plan must pay. **Any plan shortfalls must be made up and can be amortized over seven years.**

Answer 5

Actuarial cost methods depend on making assumptions about various cost factors, as actual results cannot be known in advance. The annual cost developed under an actuarial cost method depends significantly on these assumptions, and there is some flexibility in choosing assumptions. Under the Code, each assumption must be reasonable, within guidelines in the Code and regulations. Actuarial assumptions include: * Investment return on the plan fund, * Salary scale, which is an assumption about increases in future salaries and is particularly significant if the plan uses a final average type of formula, * Mortality, or the extent to which some benefits will not be paid because of the death of employees before retirement, * Annuity purchase rate, which determines the funds needed at retirement to provide annuities in the amount designated by the plan formula, * Assumptions about future investment return and postretirement mortality that the annuity purchase rate depends on, and * Turnover, or the extent to which employees will terminate employment before retirement and thereby receive limited or no benefit. **Exam Tip:** * The CFP Exam will test your knowledge as to the impact of these assumptions on the funding level of the plan for each year. * For example, if the assumption of investment return is too low, the funding may have to be increased next year.

Answer 6

An employer's maximum annual deduction for contributions to a defined benefit plan is limited to the amount determined actuarially under standards set forth in Section 404(a) of the Code, or the amount required to meet the minimum funding standards, if greater. There is a full funding limitation within the minimum funding standards that limits this deduction. **The maximum amount an employer can contribute and deduct to a defined contribution plan is 25% of aggregate covered compensation**. The definition of covered compensation includes employee elective deferrals. This has the effect of creating a higher total payroll amount which allows for greater employer contribution levels. However, employee elective deferrals are not counted as part of the 25% contribution limit placed on employers. This also allows a greater contribution by the employer as employee contributions are not part of the 25% number. For example, Lauren owns a small security firm, Eyeballs, Inc. Payroll is $100,000 and employees have made total elective contributions to the 401(k) plan of $10,000. Because elective deferrals of $10,000 do not count toward the $25,000 limit ($100,000 x 25%), the largest contribution that Eyeballs Inc. can make to the company's profit-sharing plan will be $25,000. For a combination of defined benefit and defined contribution plans, the deduction limit is the greater of: * 25% of the compensation of all participants, or * The amount required to meet the minimum standard for the defined-benefit plan. There is a penalty of 10% on nondeductible contributions by the employer, that is, contributions in excess of these limits.

Answer 7

Under the minimum funding rules: * Defined benefit plan contributions must be paid within 8½ months after the end of the plan year, and * Defined contribution pension plan contributions must be paid within 2½ months after the end of the plan year. This is subject to a six-month extension. Penalties apply if the minimum funding requirements are not met. * Profit sharing plans are not subject to the minimum funding rules. **If a defined benefit plan fails to meet certain funding requirements for a plan year, a quarterly payment requirement must be met in the following plan year**. For a calendar year taxpayer, contributions are due April 15, July 15, October 15 and January 15 of the following year and corresponding dates apply to fiscal year taxpayers. A failure to make timely payments subjects the taxpayer to interest on the missed installment. **Each quarterly payment must be 25% of the lesser of: 90% of the annual minimum funding amount, or 100% of the preceding year's minimum funding amount**.

Answer 8

There are strict limits on the extent to which an employer can exercise control over the plan fund. The plan trustee can be a corporation or an individual, even a company president or shareholder. In any case, plan trustees are subject to stringent federal fiduciary rules requiring them to manage the fund solely in the interest of plan participants and beneficiaries.

Answer 9

To prevent a qualified plan from being used primarily as a tax shelter for highly compensated employees, there is a limitation on plan benefits or employer contributions.

Answer 10

**Under a defined benefit plan, the highest annual benefit payable under the plan must not exceed the lesser of**: **100% of the participant's compensation averaged over the three highest consecutive years of highest compensation**, **or $265,000 (2023)**. The $265,000 limit is adjusted in $5,000 increments under a cost-of-living indexing formula. The $265,000 limit is also adjusted actuarially for retirement ages earlier or later than age 65.

Answer 11

**The annual additions to each participant's account are limited for a defined contribution plan**. The annual additions include: * Employer contributions * Employee elective deferrals * Forfeitures reallocated from other participants' accounts. Please note that rollovers, participant account earnings, or age 50+ catch-up contributions are not considered in applying the annual addition limits in defined contribution plans. The annual additions limit cannot exceed the lesser of: **100% of the participant's annual compensation, or $66,000(2023)**. The annual additions limit is subject to indexing in increments of $1,000.

Answer 12

A further limitation on plan benefits or contributions is that **only the first $330,000 (2023) of each employee's annual compensation can be taken into account in the plan's benefit or contribution formula**. This is referred to as **covered compensation**. * Thus, if an employee earns $400,000 annually in 2023, and the employer maintains a 10% money purchase plan, the maximum contribution for that employee would be $33,000 (10% of $330,000). The covered compensation limit is indexed for inflation in increments of $5,000. **Exam Tip:** **The covered compensation limit of $330,000 (2023) for benefit formulas applies to all qualified plans.** Be mindful of the various rules in play for a given type of plan, but remember knowing whether a plan is a defined contribution plan or a defined benefit plan is critical in solving the application-based questions you can expect on your exam.

Answer 13

**A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.** These plans **must meet certain additional qualification rules**. * **SIMPLE Individual Retirement Account (IRA) plans, as well as SIMPLE 401(k) plans that allow contributions only under Section 401(k)(11), are exempt from the top-heavy requirements**. * **Safe harbor 401(k) plans are also exempt** from the top-heavy requirements. * This rule applies to a plan that consists solely of contributions meeting the requirements of Section 401(k)(12) and safe harbor matching contributions meeting the requirements of Section 401(m)(11). **If a plan is top-heavy for a given year, it must provide more rapid vesting than generally required**. The plan can either provide **100% vesting after three years of service or 6-year graded vesting as follows**: Years of Service Vested Percentage 2 20 3 40 4 60 5 80 6 or more 100 In addition, a top-heavy plan **must provide minimum benefits or contributions for non-key employees**. For defined benefit plans the benefit for each non-key employee during a top-heavy year must be at least two percent of compensation multiplied by the employee's years of service, up to 20%. The average compensation used for this formula is based on the highest five years of compensation. Additionally, a defined benefit plan deemed top-heavy must use an accelerated vesting schedule, such as 2-to-6-year graded or 3-year cliff vesting. For a defined contribution plan, employer contributions during a top-heavy year must be at least 3% of compensation.

Answer 14

**A key employee, for purposes of the top-heavy rules, is an employee who, at any time during the plan year, is**: * An officer of the employer who has **annual compensation greater than $215,000 (2023)**. The $215,000 limit is subject to future indexing * A **more-than-five-percent owner of the employer**, or * **A more-than-one-percent owner of the employer who has annual compensation from the employer of more than $150,000** (not indexed). For these purposes, no more than 50 employees will be treated as officers. If lesser in number, the greater of three or 10% of the employees will be treated as officers. **Exam Tip:** * Distinguishing between Highly Compensated Employees (HCEs) and Key Employees is essential for navigating the retirement plan selection process and understanding certain employer-provided benefits. * **Highly Compensated**: **More than a 5% owner or received compensation in excess of $150,000** (2023) (indexed). * **Key Employee**: **Greater than a 5% owner or an officer of the employer having annual compensation greater than $215,000 or a greater than 1% owner whose salary exceeds $150,000**. Here, Mike serves up a breakdown of the two categories and points out the need-to-know elements of each category.

Answer 15

Need to keep these straight: **Highly Compensated Employees (HCEs)** - Someone that is more than a 5% owner will ALWAYS be a Highly Compensated Employee. * ADP * ACP testing * 401k * Coverage Test, Safe Harbor Test * Ratio Test * Average Benefit Test **Key Employees** * Top Heavy Testing * Qualified plans * Group life insurance

Answer 16

Adam Brendan Mike * A Highly Compensated Employee (HCE) is: * More than a 5% owner or * Compensated in excess of $130,000 (2021) (indexed) As a result, Brendan (6%) and Mike (5%) meet the 5% ownership standard. Adam is considered a HCE due to his compensation in excess of $130,000 in 2021 (i.e., $225,000).

Answer 17

**Due to the 10% penalty tax on early distributions from qualified plans, a plan provision allowing loans to employees may be attractive**. This allows employees access to plan funds without extra tax cost. However, **a loan provision increases administrative costs for the plan and may deplete plan funds available for pooled investments**. For participants to borrow from a plan, the plan must specifically permit such loans. * **Any type of qualified plan or Section 403(b) tax deferred annuity plan may permit loans**. * Loan provisions are most common in defined contribution plans, particularly profit sharing plans. * There are considerable administrative difficulties connected with loans from defined benefit plans because of the actuarial approach to plan funding. * Loans from IRAs and Simplified Employee Pensions (SEPs) are not permitted. One of the reasons that employers permit loans in 401(k) plans is to encourage non-highly compensated employees to participate. **Highly-compensated employees are only allowed to defer an amount that is based on the percentage of compensation that the non-highly compensated employees defer**. This is referred to as **Actual Deferral Percentage** and we will discuss this further. When taking a loan from a 401(k), the interest is paid back to the participant's account. There is a **drawback to taking a loan since you are using post-tax dollars to pay this interest that will later be taxed at ordinary income rates once you take distributions from the 401(k)**. However, in some cases, borrowing from a 401(k) is better than other financing arrangements based on the specific facts and circumstances of a person's situation. The graph below shows that when a participant takes out a loan from a 401(k), **there are additional record-keeping costs and increased administrative costs for the plan that are born by the plan administrator**. These costs are not paid by the participant from the interest they pay themselves back on the loan.

Answer 18

Requirements Loans to participants are generally prohibited transactions, subject to penalties unless such loans: * Are exempted from the prohibited transaction rules by an administrative exemption, or * Meet the requirements set out in Code Section 4975(d)(1). The requirements of that section are met if: * Loans made by the plan are available to all participants and beneficiaries on a reasonably equivalent basis * Loans are not made available to highly compensated employees in an amount greater than the amounts made available to other employees * Loans are made in accordance with specific provisions regarding such loans set forth in the plan * The loans bear reasonable rates of interest, and * The loans are adequately secured Loans may be made from a qualified plan to: * A sole proprietor, * A more-than-10% partner in an unincorporated business, and * An S corporation employee who is a more-than-5% shareholder in the corporation. **A loan from a qualified plan or a Section 403(b) tax deferred annuity will be treated as a taxable distribution if it does not meet the requirements of Code Section 72(p)**. * Section 72(p) provides that aggregate **loans from qualified plans to any individual plan participant** **cannot exceed the lesser of**: * **$50,000, reduced by the excess of the highest outstanding loan balance during the preceding one-year period** over the outstanding balance on the date when the loan is made, or * **One-half the present value of the participant's vested account balance, or accrued benefit in the case of a defined benefit plan**. * **A loan of up to $10,000 can be made, even if this is more than one-half of the participant's vested benefit**. For example, a participant having a vested account balance of $17,000 could borrow up to $10,000. **Loans must be repayable, by their terms, within five years, except for loans used to acquire a principal residence of the participant**. Interest on a plan loan, in most cases, will be consumer interest, which is generally not deductible by the employee, unless the loan is secured by a home mortgage. Interest deductions are specifically prohibited in two situations: * If the loan is to a key employee, as defined in the Code's rules for top-heavy plans, or * If the loan is secured by a Section 401(k) or Section 403(b) tax deferred annuity plan account based on salary reductions. **Practitioner Advice:** * Many planners discourage loans from qualified plans for two reasons. * First, the outstanding balance loses the opportunity for growth. * Second, **many plans "call the note" when an employee terminates from service**. If the employee cannot pay back the outstanding loan balance within the prescribed time period (usually 60-90 days), then the outstanding loan balance is deemed a distribution subject to taxes and possibly early withdrawal penalties.

Answer 19

* **Funding requirement**s specify that an **irrevocable trust fund or insurance contract must be set up for the exclusive benefit of plan participants**. Both employer and employee contributions to a qualified plan must be deposited into this fund. Pension plans must meet minimum funding standards, and profit-sharing plan contributions must be recurring and substantial. An actuarial cost method determines the annual cost for a plan, upon which the minimum funding standard depends. **Funding requirements also regulate the deduction limits and timing of contributions and specify strict fiduciary rules regarding the trust fund**. * **Limitations on benefits and contributions** prevent a qualified plan from being used primarily as a tax shelter for highly compensated employees. **The highest annual benefit payable for a defined benefit plan must not exceed the lesser of 100% of the participant's three-year average of highest compensation or $265,000(2023)**. Annual additions for each participant for defined contributions plans **must not exceed the lesser of 100% of the participant's annual compensation or $66,000(2023)**. * **Top-heavy requirements are applicable to a plan that provides more than 60% of its aggregate accrued benefits or account balances to key employees**. Such top-heavy plans must meet additional qualification rules such as **rapid vesting and benefit levels or contributions for non-key employees**. * **Loan provisions** allow employees to borrow from the plan funds **without extra tax costs**. Such loans must be exempted from the prohibited transaction rules and meet the Code requirements.

Answer 20

A requirement that employees must complete five years of service before participating in the plan. * The plan would be disqualified if a five-year waiting period is imposed for plan participation. It cannot require more than one year of service for eligibility. The only exception is that it can require a waiting period of two years, if the plan provides 100% vesting upon entry.

Answer 21

The amount of a loan must not exceed $10,000 * A reasonable rate of interest, availability to all participants on a reasonably equivalent basis and adequate securing of loans are three of the requirements for loans to be exempted from the prohibited transaction rules. However, loans may exceed $10,000, but cannot exceed $50,000.

Answer 22

In a non-top heavy Defined Benefit Plan, employees are 40% vested after five years of service, and vesting increases by 20% each year until reaching 100% after seven years. * In a Defined Contribution plan, the vesting schedule must not exceed the Top Heavy vesting schedules: 2-6 year graded or 3 year cliff. A Defined Benefit plan may use 3-7 year graded and 5 year cliff. Therefore, in a Defined Benefit plan, the employee must be at least 60% vested after five years of service which increases by 20% per year until full vesting in seven years.

Answer 23

12-month period during which the employee has at least 1,000 hours of service. * For eligibility purposes, a year of service means a 12-month period during which the employee has at least 1,000 hours of service.

Answer 24

* Highly Compensated - A greater than 5% percent owner or received compensation in excess of $130,000 in the prior year * Top-Paid Group - The group of employees in the top 20%, ranked on the basis of compensation paid for the year. * Key Employee - A greater than 5% owner; an officer with income in excess of $215,000 or a greater than one percent owner with income greater than $150,000

Answer 25

To ensure that you have a solid understanding of defined contribution plans, the following topics will be covered in this lesson: * Money Purchase Pension Plan * Profit Sharing Plan * Savings Plan * Section 401(k) Plan * Target/Age Weighted Plan Upon completion of this lesson, you should be able to: * State the principal features of money purchase pension plans, * Describe the design of a profit sharing plan, * Explain the working of a savings plan, * Define structure of a Section 401(k) plan, * State the characteristics of target age/weighted plans, * Identify the circumstances in which each plan may be offered, * List the advantages and disadvantages of each defined contribution plan, and * Analyze the tax implications of each plan.

Answer 26

A money purchase pension plan is a qualified employer retirement plan that is, in many ways, the **simplest of all qualified plans**. The following are the highlights of a money purchase plan: * Each employee has an individual account in the plan. **The employer makes annual contributions to each employee's account under a nondiscriminatory contribution formula**. Usually the formula requires a contribution of a specified percentage, **which may total up to 25% of the employer's covered compensation**. * Plan benefits consist of the amount accumulated in each participant's account at retirement or termination of employment. This is the total of employer contributions, interest or other investment return on plan assets and capital gains realized by the plan on sales of assets in the employee's account. * The **plan may provide that the employee's account balance is payable in one or more forms of annuities equivalent in value to the account balanc**e.

Answer 27

A business of any size may find the money purchase pension plan suitable. **The most common situations wherein a money purchase pension plan may be used are as follows**: * When an employer wants to install a qualified retirement plan that is **simple to administer and explain to employees**. * When **employees are relatively young and have substantial time to accumulate retirement savings**. * When employees are willing to accept a degree of investment risk in their plan accounts, in return for the potential benefits of good investment results. * When some degree of retirement income security in the plan is desired. While accounts are not guaranteed, **annual employer contributions are required**. This **provides a degree of retirement security that is intermediate between a defined benefit plan and a profit sharing plan**. * When an **employer seeks to reward long-term employee relationships**.

Answer 28

**The major advantage of the money purchase pension plan is that it is not complex and expensive to design. It also guarantees that employees receive an annual contribution**. The advantages of the money purchase pension plan are as follows: * As with all qualified plans, a money purchase pension plan **provides employees a tax-deferred retirement savings medium**. * The plan is relatively **simple and inexpensive to design, administer and explain to employees**. * The **plan formula can provide a deductible annual employer contribution of up to 25% of aggregate covered compensation**. Additionally, **employees are restricted to individuals receiving total annual additions no greater than:** * **$66,000(2023)**, or * **100% of compensation**. Individual participant accounts allow participants to choose the investment allocation in their account from the choices offered in the plan.

Answer 29

* There are some disadvantages of the money purchase plan that involve employees entering the plan at older ages, highly compensated employees and general investment risks: * **Retirement benefits may be inadequate for employees who enter the plan at older ages**. For example, an employer contributes 10% of compensation annually to each employee’s account. Assume that the plan fund earns 9% interest on average. The accumulation at age 65 for employees with varying entry ages will be as follows: Age at plan entry Annual compensation Account balance at age 65 25 $35,000 $1,289,022 30 $35,000 $822,937 40 $35,000 $323,134 50 $35,000 $112,012 55 $35,000 $57,961 60 $35,000 $22,832 This table shows that **the time factor works rapidly to increase account balances**. If a closely held corporation that has been in business for many years adopts a money purchase plan, key employees often will be among the older plan entrants. The money purchase pension plan's failure to provide adequately for such employees, even with their high compensation levels, can be a serious disadvantage. However, there’s another factor in realistic situations that reduces the apparent disparity between long-service and short-service employees. **As salaries increase over time, the long-service/short-service disparity in the annual pension from a money purchase plan, as a percentage of final average compensation, is much less than if salaries do not increase**. Click here to view a chart that shows that * if all salaries increase at 7% annually, a 15-year employee receives a pension of 19% of final average salary while the 35-year employee gets 48% of final average salary. * This is much less than the disparity resulting if salaries increase at only 3% annually, or do not increase at all. In short, in actual practice a money purchase plan may not be as disadvantageous to shorter service employees as it might appear. * **In 2023, total annual additions for each employee by all plans of a single employer is limited to the lesser of: $66,000, or 100% of compensation**. The 415 threshold limits the relative amount of funding available for highly compensated employees. * For example, if an employee earns $400,000 in 2023, no more than $66,000 annually can be contributed for that employee. * This $66,000 represents only 20% of the $330,000(2023) of the employee's covered compensation that can be taken into account. * Overall, it is 15.25% of the employee's actual income. * **Employees bear investment risk under the plan. The ultimate amount that can be accumulated under a money purchase plan is very sensitive to investment return, even for an employee who entered the plan at an early age**. Click here to view a graph that shows this by comparing the ultimate account balance resulting from * $1,000 of annual contribution at two different return rates. While bearing investment risk is a potential disadvantage to employees, it does tend to reduce employer costs as compared with a defined benefit plan. * The plan is subject to the Code’s minimum funding requirements. **Employers are obligated to make the plan contribution each year or be subject to minimum funding penalties**.

Answer 30

**Most money purchase pension plans use a benefit formula requiring an employer contribution that is a flat percentage of each employee's compensation**. * Percentages up to 25% may be used. * Only the first $330,000 in 2023 of each employee's compensation can be taken into account in the plan formula. **Some money purchase pension formulas also use a factor related to the employee's service**. * Service-related factors generally favor owners and key employees. * In small, closely-held businesses or professional corporations, the use of a service-related factor **might result in prohibited discrimination in favor of highly compensated employees. Plan designers generally avoid service-related contribution formulas in these situations**. **Nondiscrimination regulations under Code Section 401(a)(4) provide safe harbors for money purchase pension plans with uniform allocation formulas**. Alternative methods for satisfying nondiscrimination requirements include satisfying a general nondiscrimination test, restructuring or cross-testing, that is, testing defined contribution plans on the basis of benefits. **A plan benefit formula can be integrated with Social Security, also referred to as permitted disparity**. * This avoids duplicating Social Security benefits already provided to the employee and reduces employer costs for the plan. * An integrated formula defines a level of compensation known as the **integration level**. * **The plan then provides a higher rate of employer contributions for compensation above that integration level than the rate for compensation below that integration level**. For example, the money purchase plan specifies an integration level of $20,000. It provides for employer contributions of 14% of compensation above the $20,000 integration level and 10% below the $20,000 integration level. Following are the details of employee Art Rambo: Art's earnings for this year: $30,000 Employer contribution to Art's account this year: 14% of $10,000, which is Art's compensation in excess of the $20,000 integration level $1,400 10% of the first $20,000 of Art's compensation $2,000 $3,400 The Internal Revenue Code and regulations specify the degree of integration permitted in a plan. **Any of the Code's permitted vesting provisions can be used in a money purchase plan**. As money purchase plans tend to be oriented toward longer service employees, the 2-6 year graded vesting schedule is often used. This means employees will be at least vested in 20% of the employer contributions after two years with at least an additional 20% vesting for each year following until fully vested after six years. **If an employee leaves before becoming fully vested in his or her account balance, an unvested amount referred to as a forfeiture is left behind in the plan**. * **Forfeitures can be used either to reduce future employer contributions under the plan, or they can be added to the remaining participants' account balances**. * Adding forfeitures to participants' account balances **tends to be favorable to key employees, as they are likely to participate in the plan over a long time period**. * For this reason, **the IRS requires forfeitures to be allocated in a non-discriminatory manner**. This usually requires forfeiture allocation in proportion to participants' compensation, rather than in proportion to their existing account balances. **Benefits in a money purchase pension plan are usually payable at the termination of employment or at the plan's stated normal retirement age**. * Money purchase pension plans traditionally provide that the participant's account balance is **converted to an equivalent annuity at retirement, based on annuity rates provided in the plan**. * This is the origin of the term money purchase. * It has **become more common to provide for a lump sum or installment payment from the plan as an alternative to an annuity**. * However, a money purchase pension plan, as a condition of qualification, **must provide a joint and survivor annuity as the automatic form of benefit**. * **The participant, with the consent of the spouse, may elect a different benefit option**. The IRS generally does not allow money purchase plans to provide for in-service distributions, that is, benefits payable before termination of employment. Distributions of employer contributions or earnings from pension plans are not permitted prior to death, retirement, disability, severance of employment, or termination of the plan. However, **plan loan provisions are allowable, although relatively uncommon**. If money purchase plan assets are spun-off to a profit-sharing plan, the accounts in the new plan must retain the money purchase restrictions on in-service distributions. However, if the money purchase pension accounts are rolled over to a profit-sharing plan, the money purchase plan in-service restrictions no longer apply. **Money purchase pension plan funds are generally invested in a pooled account managed by the employer or a fund manager designated by the employer, through a trustee or insurance company. Either a trust fund or group or individual insurance contracts can be used**.

Answer 31

As with all qualified plans, contributions to the money purchase plan are tax-deferred. The details of the tax implications of money purchase plans are as follows: * **Employer contributions to the plan are deductible by the employer when made**, so long as the plan remains qualified. A plan is qualified if it meets eligibility, vesting, funding, and other requirements of the Code. In addition, the plan must designate that it is a money purchase pension plan. * Assuming the plan remains qualified, **taxation of the employee on plan contributions is deferred**. Both employer contributions and earnings on plan assets are **nontaxable to plan participants until withdrawn**. * Under Code Section 415, for the year 2023, annual additions to each participant's account are limited to the lesser of: * **100% of the participant's compensation, or** * **$66,000**. * Annual additions include: * Employer contributions to the participant's account, * Forfeitures from other participants' accounts, and * Employee contributions to the account. * Distributions from the plan must follow the rules for qualified plan distributions. Certain premature distributions are subject to penalties. * **The plan is subject to the minimum funding rules of Section 412 of the Code**. This requires minimum annual contributions, which are subject to a **penalty imposed on the employer if less than the minimum amount is contributed**. For a money purchase plan, the minimum contribution is generally the amount required under the plan's contribution formula. For example, if the plan formula requires a contribution of 20% of each participant's compensation, this is generally the amount required to meet the minimum funding rules. * **A plan may permit employees to make voluntary contributions to a deemed IRA established under the plan**. Amounts so contributed reduce the limit for other traditional or Roth IRA contributions and are subject to the phase-out rules applicable to traditional or Roth IRAs for participants covered under a qualified retirement plan. * **The plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA) reporting and disclosure rules.**

Answer 32

There are several alternatives to the money purchase pension plan. A comparison of these alternatives with the money purchase plan is listed below: * **Target benefit pension plans** are much like money purchase plans, but the **employer contribution percentage can be based on age at plan entry, which would be higher for older entrants**. Such a plan may be **more favorable where the employer wants to provide adequate benefits for older employees.** * **Profit-sharing plans** provide **more employer flexibility in contributions but less security for participants**. The **limit on employer deductible contributions to a profit-sharing plan is 25% of covered compensation**. * **Defined benefit pension plans** provide more **security of retirement benefits and proportionately greater contributions for older plan entrants, but are much more complex to design and administer**. * **Nonqualified** deferred compensation plans **can be provided exclusively for selected executives, but the employer's tax deduction is generally deferred until benefit payments are made**. This can be **as much as 20 or 30 years after the employer's contribution is made**. * Individual retirement saving is available as **an alternative or supplement to an employer plan, but except for certain IRAs, there is no tax deductibility to the employee**.

Answer 33

**A profit sharing plan is a qualified, defined contribution plan featuring a flexible employer contribution provision**. The outstanding characteristics are: * **The employer's contribution to the plan each year can be either a purely discretionary amount or, if the employer wishes, nothing at all**. Otherwise it **can be based on some type of formula, usually relating to the employer's annual profits**. * **Each participant has an individual account in the plan**. **The employer's contribution is allocated to the individual participant accounts on the basis of a nondiscriminatory formula**. The formula usually allocates employer contributions in proportion to each employee's compensation for the year. Age-weighted formulas can be used as well. Plan benefits consist of the amount accumulated in each participant's account at retirement or termination of employment. This is the total of: * Employer contributions, * Forfeitures from other employees' accounts, and * The interest, capital gains and other investment return realized over the years on plan assets. **The plan usually distributes the employee's account balance in a lump sum at termination of employment, although other forms of payout may be available or, in the case of certain plans, may be required**.

Answer 34

**A business where profits vary considerably from year to year would usually find a profit sharing plan appropriate**. A profit sharing plan is structured to suit the following situations: * When an employer's profits or financial ability to contribute to the plan varies from year to year. A profit sharing plan is particularly **useful as an alternative to a qualified pension plan where the employer anticipates that there may be years in which no contribution can be made.** * When the employer wants to adopt a qualified plan with an incentive feature by which contributions to employee accounts increase with the employer's profits. * When the employee group has the following characteristics: * **Many employees are relatively young and have substantial time to accumulate retirement savings**. * Employees can, and are willing to, accept a degree of investment risk in their accounts in return for the potential benefits of good investment results. * **When the employer wants to supplement an existing defined benefit plan**. The **advantages of a profit sharing plan tend to provide exactly what is missing in a defined benefit plan - and vice versa - so that the two together provide an ideal balanced tax-deferred savings and retirement program.**

Answer 35

**The profit-sharing plan provides employers with the flexibility to vary the annual contributions. It is appropriate for businesses with unpredictable cash flows. It is inexpensive and simple to design and implement**. Its advantages are: * The **maximum employer contribution is 25% of covered compensation**. * The **maximum compensation base for each employee is $330,000(2023)**. * **Employees may receive annual additions up to the lesser of 100% of compensation or $66,000(2023)**. * A profit-sharing plan **provides maximum contribution flexibility from the employer's viewpoint**. * **Contributions can be made even if there are no current or accumulated profits**. Even a nonprofit organization can have a qualified profit-sharing plan. * As with all qualified plans, a profit-sharing plan provides employees with a **tax-deferred retirement savings medium**. * The plan is relatively simple and inexpensive to design, administer and explain to employees. * Profit-sharing plan benefits are **among the most portable as they can be rolled to other plans and IRAs** * Individual participant accounts allow participants to benefit from good investment results in the plan fund.

Answer 36

False. * Contributions can be made even if there are no current or accumulated profits. Even a nonprofit organization can have a qualified Profit Sharing Plan.

Answer 37

The disadvantages of a profit sharing plan are listed as follows: * Like money purchase plans, **retirement benefits may be inadequate for employees who enter the plan at older ages**. The problem of adequate benefits is even **worse in a profit sharing plan than in a money purchase plan because a profit sharing plan does not involve any required minimum annual contribution by the employer**. Thus, ultimate retirement benefits in a profit sharing plan are quite speculative. Therefore, **some planners consider a profit sharing plan primarily as a supplemental form of incentive-based deferred compensation and not as a retirement plan**. However, this disadvantage can be reduced by using an age-weighted formula which will allow a greater percentage of contributions for older participants. * Despite the increase in the annual additions limit, the relative amount of plan funding available for highly compensated employees represents a smaller percentage of their compensation than can be contributed for lower-paid employees. * Employees bear investment risk under the plan. While bearing investment risk is a potential disadvantage to employees, from the employer's viewpoint it is an advantage compared with a defined benefit plan. The employer's risk and costs tend to be lower for a profit sharing plan. * **From the employee's standpoint, profit sharing plans are disadvantageous compared to pension plans because there is no predictable level of employer funding under the plan. However, employees have a right to expect that employer contributions will be substantial and recurring**.

Answer 38

**Employer contributions to a profit sharing plan can be based on either**: * **A discretionary provision**, or * **A formula provision**. Under a discretionary provision, the employer can determine each year the amount to be contributed. A contribution can be made to a profit sharing plan even if there are no current or accumulated profits. **If the employer desires to make a contribution, any amount up to the maximum deductible limit can be contributed**. An employer can omit a contribution under a discretionary provision, but **IRS regulations require recurring and substantial contributions**. There are no clear guidelines from the IRS as to how often contributions can be omitted. **If too many years go by without contributions, the IRS will likely claim that the plan has been terminated**. * **When a qualified plan is terminated, all non-vested amounts in participants' accounts become 100% vested. This is usually an undesirable result from the employer's viewpoint**. Under a **formula provision, a specified amount must be contributed to the plan whenever the employer has profits**. For example, a formula might provide that the employer will contribute 10% of all company profits in excess of $100,000. This, **however, must not exceed the deduction limit that we have already discussed**. The IRS does not dictate how to define profits for this purpose, so the employer can specify any appropriate formula. **The most common approach is to define profits as determined on a before-tax basis under generally accepted accounting principles**. As mentioned earlier, even a nonprofit corporation can adopt a profit sharing plan with contributions based on some appropriately defined surplus account. Once a formula approach has been adopted, the employer is legally obligated to contribute the amount determined under the formula. **However, formulas can be drafted that allow an omitted contribution if certain adverse financial contingencies occur. A suitable fail-safe provision of this type will avoid the necessity of amending the plan in the future if financial difficulties arise**.

Answer 39

All profit-sharing plans, regardless of how the total amount of employer contributions is determined, must have a formula under which the employer's contribution is allocated to employee accounts. This allocation formula must not discriminate in favor of highly compensated employees. **Most formulas make an allocation to participants on the basis of their compensation as compared with the compensation of all participants**. For example, participant Fred earns $50,000 this year. The total payroll for all plan participants this year is $500,000. For this year, the employer contributes $100,000 to the plan and the amount allocated to Fred's account is determined as follows: * Total employer contribution x (Fred's Compensation/Compensation of All Participants) * $100,000 x ($50,000 / $500,000) =$10,000 * The allocation to Fred's account equals 1/10 of $100,000, or $10,000. **The plan must define the term compensation in a nondiscriminatory way.** For instance, if compensation is defined to include bonuses and exclude overtime pay, and only highly compensated employees receive bonuses and only lower-paid employees receive overtime pay, the formula would likely be found discriminatory. **It is important to remember the $330,000 (2023) limit on the amount of each employee's compensation that can be taken into account in the allocation formula, as well as for the 25% deduction limit discussed later**. **Some profit-sharing allocation formulas also take into account the years of service of each employee**. **Such a formula can satisfy the nondiscrimination requirements by meeting the requirements for one of the safe harbors provided in the regulations or by utilizing cross-testing**. Alternative methods for satisfying nondiscrimination requirements include satisfying a general nondiscrimination test, restructuring or cross-testing, that is, testing defined contribution plans on the basis of benefits. Plans that use these concepts are often called "**cross-tested plans," "new comparability plans," or "comparability plans.**" **The allocation formula can be integrated with Social Security**. This helps the employer avoid duplicating Social Security benefits that are already provided to the employee. It also reduces the employer's cost of the plan. **An integrated formula defines a level of compensation known as the integration level. The integration level is typically the taxable Social Security wage base ($160,200 in 2023). The plan then provides a higher rate of allocation of the employer contribution for compensation above that integration level than the rate for compensation below that integration level**.

Answer 40

Following the Pension Protection Act of 2006, employer contributions to profit sharing plans **must vest using the faster vesting schedules that apply to top heavy plans and employer matching contributions**. * This means that employer profit sharing contributions must use a vesting schedule that **is as least as generous as two to six year graded or three year cliff vesting**. Many employers use the graded two to six year vesting provision. This provides 20% vesting after two years of service. Vesting increases by 20% for each subsequent year of service and reaches 100% after six years of service. This applies to all employer contributions to the plan including profit sharing contributions and matching contributions. **If an employee leaves before becoming fully vested in his or her account balance, the non-vested amount, referred to as forfeiture, is left behind in the plan. In profit sharing plans, forfeitures are usually added to remaining participants' account balances. Adding forfeitures to participants' account balances tends to favor key employees, as they are more likely to participate in the plan over a long time period. For this reason, forfeitures must be allocated in a nondiscriminatory manner. This usually requires forfeiture allocation in proportion to participants' compensation rather than in proportion to their existing account balances. In profit sharing plans, the formula for allocating forfeitures is usually the same as the formula for allocating employer contributions to participants' accounts**. **In a profit sharing plan, it is common to use participant investment direction or earmarking of participants' accounts**. Earmarked accounts can be invested at the participant's direction. Usually, the plan limits the number of possible investments to reduce administrative costs. If the participant-directed account provision meets certain requirements set forth in Department of Labor (DOL) regulations, the plan trustee is generally relieved of fiduciary responsibility for any losses resulting from an investment chosen by the participant. **Typically, the plan will offer the participant a choice of investments from a family of mutual funds. Under the DOL regulations, at least three diversified choices must be permitted.**

Answer 41

Benefits from a profit sharing plan are **usually payable at termination of employment or at the plan's stated normal retirement age**. **Profit sharing plans usually provide payment in the form of either a lump sum or a series of installment payments**. The minimum installment payment must meet the minimum distribution rules specified in the Code. **Some profit sharing plans also offer annuity options with a life contingency, but this is relatively uncommon**. However, certain plans are subject to the joint and survivor annuity requirements. **Profit sharing plans typically allow in-service distributions, that is, benefits payable before termination of employment**. Many plans allow such distributions only in the event of **hardship** as specified in the plan. Typical hardship situations might include **medical emergencies, home repair or educational expenses**. Employers traditionally administer such hardship provisions fairly liberally for the benefit of employees. * **The strict hardship definition applicable to Section 401(k) plans does not apply to profit sharing plans**. **The amount that a participant can withdraw before retirement or termination of employment cannot exceed the participant's vested account balance**. * In addition, the IRS has generally required that employer contributions not be withdrawn from the plan before termination of employment unless they have been in the plan for at least a two-year period. * In some cases, the two-year period can be waived if the participant has a minimum specified number of years of service, such as five. * In order to control and limit withdrawals to prevent depletion of plan funds, **many plans impose a plan penalty for withdrawals, such as suspending an employee from the plan for a period of six months after a withdrawal**. No plan penalty, however, can take away any of the participant's vested benefits. In addition to any plan penalties that may apply, **there is a 10% early distribution penalty for many distributions to participants before age 59 1/2 unless one of the exceptions is met**. Due to the impact of the 10% early distribution penalty, it is very much in plan participants' interests to have a loan provision in a profit sharing plan. **Loan provisions allow participants access to plan funds for emergencies and other financial needs without incurring the tax penalty of an early withdrawal. Profit sharing plan funds are generally invested in a pooled account managed, through a trustee or insurance company, by the employer or a fund manager designated by the employer.** Either a trust fund or group or individual insurance contract can be used.

Answer 42

**The tax implications for profit-sharing plans are**: * Employer contributions to the plan are deductible when made, so long as the plan remains qualified. A plan is qualified if it meets eligibility, vesting, funding, and other requirements. In addition, the plan must designate that it is a profit-sharing plan. * **The maximum deductible employer contribution to the plan cannot exceed 25% of the payroll of all employees covered under the plan**. **Any excess over these limits is not only nondeductible but is also generally subject to a 10% penalty**. However, contributions to one or more defined contribution plans that are nondeductible when contributed solely because of the combined plan deduction limit may be subject to an exception from the 10% penalty. The exception generally applies to the extent that such contributions do not exceed the greater of: * **6% of the compensation paid or accrued during the taxable year for which the contributions were made, to beneficiaries under the plans**, or * **The sum of employer matching contributions plus elective deferrals**. * **Only the first $330,000(2023) of each employee's compensation can be taken into account for purposes of this limit**. If an employer maintains a defined benefit plan covering some of the same employees, the total deductible contribution for both plans is limited to 25% of the compensation of the covered employees or, if greater, the amount necessary to meet the minimum funding standard for the defined benefit plan, in which case the contribution to the profit-sharing plan cannot be made. * Assuming the plan remains qualified, the **taxation of the employee is deferred**. That is, the following are all **nontaxable to a plan participant until withdrawn:** * Employer contributions, * Forfeitures added to the participant's account, * Investment earnings on the account, and * Capital gains realized in the account. * **Code Section 415 limits annual additions to each participant's account in a defined contribution plan to the lesser of**: * **100% of the participant's compensation**, or * **$66,000(2023)**. * Annual additions include: * Employer contributions to the participant's account, * Forfeitures from other participants' accounts, and * Employee contributions to the account. * Distributions from a plan must follow the rules for qualified plan distributions. * **Certain employers adopting a plan may be eligible for a business tax credit to offset qualified plan startup costs**. * The plan is subject to the **ERISA** reporting and disclosure rules.

Answer 43

An analysis of the needs of the business for which a plan is designed must include comparison of the profit sharing plan with the other available alternatives: * **Money purchase pension plans** are defined contribution plans similar to profit sharing plans except that the **employer is required to make a contribution to a money purchase plan each year**. **Both plans allow a contribution and deduction of up to 25% of each participant's compensation**. * **Target, age-weighted and cross-tested plans are defined contribution alternatives similar to defined benefit plans**. With these plans, the employer contribution percentage can be based on age at plan entry - higher for older entrants. **One of these plans may be favorable where the employer wants to provide adequate benefits for older employees who are often also key employees**. * **Defined benefit plans** provide more security of retirement benefits and proportionately greater contributions for older plan entrants, but are much more complex to design and administer. * **Nonqualified deferred compensation plans** can be provided exclusively for selected executives. However, the employer's tax deduction when a nonqualified plan is used is generally deferred until benefit payments are made. This can be as much as 20 or 30 years after the employer's contribution is made. * **Individual retirement saving** - is an alternative or a supplement to an employer plan. However, there is little or no tax deduction and tax deferral available except for the limited traditional and Roth IRA provisions.

Answer 44

**A savings plan is a qualified defined contribution plan that is similar to a profit sharing plan, with features that provide for and encourage after-tax employee contributions to the plan. It is also called a thrift plan**. A typical savings plan **provides for after-tax employee contributions with matching employer contributions**. * **Each employee elects to contribute a certain percentage of his or her compensation. These employee contributions are matched, either dollar for dollar or under some other formula, by employer contributions to the plan**. * **Employee contributions are not deductible**. * The **employee pays tax on the money before contributing it to the plan**. Pure savings plans, featuring only after-tax employee contributions **have generally been replaced by 401(k) plans, which feature before-tax employee contributions**. * **However, a savings plan with after-tax employee contributions is often added to a Section 401(k) plan**.

Answer 45

**A savings plan can be adapted for use along with other plans in an employee retirement package**. It is used in the following ways and circumstances: * **As an add-on feature to a Section 401(k) plan it allows employees to increase contributions beyond the annual limit on salary reductions under Section 401(k) plans**. However, after-tax contributions are subject to their own complex limitations. * When the employee group has the following characteristics: * **Many employees are relatively young and have substantial time to accumulate retirement savings**. * Many employees are willing to accept a degree of investment risk in their plan accounts in return for the potential benefits of good investment results. * **There is a wide variation among employees in the need or desire for retirement savings**. * **When the employer wants to supplement the company's defined benefit pension plan with a plan that features individual participant accounts and the opportunity for participants to save on a tax-deferred basis. The use of a combination of plans provides a balanced retirement program**. * **The defined benefit plan appeals to older employees with a desire for secure retirement benefits**. * On the other hand, **the savings plan or other defined contribution plan such as a profit sharing or Section 401(k) plan generally appeals to younger employees who prefer to see their savings build up year-by-year rather than anticipating a projected benefit when they retire**.

Answer 46

The advantages of a savings plan are: * As with all qualified plans, a savings plan provides a **tax-deferred retirement savings medium for employees**. The tax on the after-tax employee contribution itself is not deferred. However, **subsequent investment earnings on after-tax employee contributions are generally not subject to tax until distributions are made to employees from the plan**. * The plan allows employees to control the amount of their savings. **Employees have the option of taking all their compensation in cash and not contributing to the plan**. However, if they do so, they generally **lose any employer matching contributions under the plan**. * Lump-sum distributions from the plan may be eligible for a special 10-year averaging tax computation available to certain employees born before 1936. * Individual participant accounts allow participants to benefit from good results in the plan fund.

Answer 47

The disadvantages of the savings plan are: * The **plan cannot be counted on by employees to provide an adequate benefit. The benefits will not be significant unless employees make substantial contributions to the plan on a regular basis**. Furthermore, employees who enter the plan at older ages may not be able to make sufficient contributions to the plan, even if they wish to do so, because of the limits on annual contributions and the limited number of years remaining for plan contributions prior to retirement. * **Employees bear investment risk under the plan**. Bearing the investment risk is a potential disadvantage to employees, but **from the employer's perspective, the shift of risk is a positive feature**. * **Employer costs are lower for a defined contribution plan such as a savings plan, as compared with a defined benefit plan**. * As employee accounts and matching amounts must be individually accounted for in the plan, the **administrative costs for a savings plan are greater than those for a money purchase or a profit-sharing plan without employee contributions**. * Employee contributions to a Savings or Thrift plan are counted towards the annual limit on annual additions limit of: * **100% of compensation**, or * **$66,000(2023)**. * This may **limit the relative tax advantage available to highly compensated employees under a savings plan or any other defined contribution plan**.

Answer 48

**The outstanding features in the design of the savings plan are**: * **Employer and employee contributions towards the plan**, * **Participant investment direction or earmarking**, and * It's **use as an add-on to the Section 401(k) plan**.

Answer 49

Typical savings plans provide after-tax employee contributions with employer matching contributions. Participation in the plan is voluntary and **each employee elects to contribute a chosen percentage of compensation up to a maximum percentage specified in the plan**. The **employee receives no tax deduction for this contribution and the contribution is fully subject to income tax as if it were in the employee's hands**. **The employer may make a matching contribution to the savings plan. The employer match can be dollar-for-dollar or the employer may put in some percentage of the employee contribution**. A typical plan might permit an employee to contribute annually any whole percentage of compensation from 1% to 60%, with the employer contributing at the rate of half the chosen employee percentage up to 6%. If the employee elected to contribute 4% of compensation, the employer would be obligated to contribute an additional 2%. **Contributions by the employer to Profit Sharing plans must use vesting schedules that are at least as generous as two to six year graded or three year cliff.** **In general, higher paid employees are in a position to contribute considerably more to this type of plan than lower paid employees**. To prevent discrimination in savings plans, Section 401(m) imposes tests that effectively limit contributions by highly compensated employees. * **One of the principal administrative burdens in a savings plan is a need to monitor employee contribution levels to be sure the Section 401(m) nondiscrimination tests are met.**

Answer 50

Apart from the employee contribution features, savings plans have features similar to profit sharing plans. **Emphasis is usually put on the savings account-like features of the plan**. * Usually there are generous provisions for employee withdrawal of funds and for plan loans. * Savings plans often feature participant investment direction or earmarking. **Earmarking is usually provided by allowing employees a choice among several specified pooled investment funds such as mutual funds**. * However, it is possible to allow participants to direct virtually any type of investment for their account, although it may be administratively burdensome. * If certain Department of Labor (DOL Reg. 404 (c)) regulations are satisfied, the plan trustee and the employer are partially relieved of fiduciary liability for unsatisfactory investment results from investments chosen by the participant under a participant-directed investment provision. * **The regulations include the requirement that at least three different diversified investment alternatives be made available to the employee**. * **Life insurance can be used in the plan**.

Answer 51

Although savings plans with only after-tax employee contributions and employer matching contributions were very popular in the past, **the after-tax employee contribution approach is used more often as an add-on to a Section 401(k) plan**. * **Employers often adopt a plan that combines all the features of a regular profit sharing plan, a savings plan and Section 401(k) salary reductions**. These combined plans can have one or more of the following features: * Employee after-tax contributions * Employer matching of employee after-tax contributions * Employee before-tax salary reductions (Section 401(k) amounts) * Employer matching of Section 401(k) amounts * Employer contributions based on a formula * Discretionary employer contributions

Answer 52

True * Although savings plans with only after-tax employee contributions and employer matching contributions were very popular in the past, the after-tax employee contribution approach is used more often as an add-on to a Section 401(k) plan.

Answer 53

**The details of the tax implications for savings plans are as follows**: * Employer contributions to the plan are deductible when made, so long as the plan remains qualified and separate accounts are maintained for all participants in the plan. A plan is qualified if it meets eligibility, vesting, funding and other requirements defined in the Code. Employer matching contributions are subject to a faster vesting schedule. * **Employee contributions to the plan, whether or not matched, are not tax deductible**. Before-tax employee salary reductions must meet the requirements of Section 401(k). * Assuming a plan remains qualified, taxation of the employee is deferred with respect to: * Employer contributions to the plan, and * Investment earnings on both employer and employee contributions. * **These amounts are nontaxable to plan participants until a distribution is made from the plan. Recovery of the nontaxable amount differs depending on whether the after-tax contributions were made before 1987 or after 1986**. * In order to be deemed nondiscriminatory, that is, to **prevent the plan from discriminating in favor of highly compensated employees, the plan must meet an actual contribution percentage (ACP) test under Code Section 401(m)**. * **Certain employers adopting a plan may be eligible for a business tax credit of up to $500 for qualified startup costs**. * A plan may permit employees to make voluntary contributions to a deemed IRA established under the plan. Amounts so contributed reduce the limit for other traditional or Roth IRA contributions. * **Distributions from the plan must follow the rules for qualified plan distributions. Certain premature distributions are subject to penalties**. * **Certain employees born before 1936 may be eligible for a 10-year averaging tax calculation on lump-sum distributions**. Not all distributions are eligible for these special tax calculations. * The plan is subject to the **ERISA** reporting and disclosure rules.

Answer 54

**Actual Deferral Percentages (ADP) testing is required to prevent the plan from discriminating in favor of highly compensated employees**. This test is applied to employee contributions in a 401(k) plan. **A separate test, the Actual Contribution Percentage (ACP) test, is made for matching contributions**. However, employee contributions must be tested under the first alternative, while matching contributions can meet the ACP test in any of the following three alternative ways: * The ACP test is satisfied for a plan year if, **for highly compensated employees, the average ratio of employee contributions, both matched and non-matched, plus employer matching contributions to compensation for the plan year does not exceed the greater of:** * **125 percent of the contribution percentage, that is, ratio for all other eligible employees for the preceding plan year**, or * **The lesser of**: * **200 percent of the contribution percentage for all other eligible employees**, or * **Such percentage plus two percentage points for the preceding plan year**. A simple chart can help you apply this rule: % for Non-Highly Compensated % for Highly Compensated 0-2% 2 x 2-8% 2+ 8+ 1.25x For example, if contributions from nonhighly compensated employees equaled 6% of compensation, contributions for highly compensated employees would be limited to 8% (6% plus 2%). Under the Code and regulations, the employer may take into account certain 401(k) salary reduction contributions and certain employer plan contributions in meeting this test.

Answer 55

**Alternatively, the ACP test can be satisfied with respect to matching contributions**. Under a simplified safe harbor test, the plan satisfies the nondiscrimination test with respect to matching contributions if it satisfies: * A contribution requirement, * A notice requirement, and * A matching contribution limitation. **This test generally parallels the requirements for a safe harbor 401(k) plan as follows**: The contribution requirement for the safe harbor test states that the employer must make matching contributions. These contributions must be equal to 100% of elective contributions but not exceeding 3% of compensation, plus 50% of elective contributions that exceed 3% but do not exceed 5% of compensation. However, in no event can the rate for highly compensated employees exceed the rate for nonhighly compensated employees. Otherwise, the employer must make nonelective contributions on behalf of all employees, which is equal to at least 3% of compensation. Under the notice requirement, each employee eligible to participate must, before the plan year begins, be given written notice that: The plan may be amended during the plan year to provide a nonelective contribution of at least 3%, and If it is, a supplemental notice will be given to eligible employees 30 days prior to the last day of the plan year informing them of the amendment. If the plan is amended, the supplemental notice must then be provided to each eligible employee at least 30 days prior to the end of the plan year, that is, by December 1 for a calendar year. **The matching contribution limitation is met if: No employer match can be made for employee deferrals in excess of 6% of compensation** **The rate of match does not increase as the employee deferral rate increases, and Matching contribution rates for highly compensated employees are not greater than those for nonhighly compensated employees**. Under the first alternative, **the employer must conduct annual testing to monitor the level of contributions made by nonhighly compensated employees, and then make sure that highly compensated employees do not exceed this level the following year, in order for the plan to remain qualified**. The second and third alternatives are design-based so that annual testing of matching contributions is not necessary, but both include a funding requirement. The definition of highly compensated employee for purposes of these tests is the same as that applicable to all benefit plans.

Answer 56

A Section 401(k) plan is a **qualified profit-sharing or stock bonus plan under which plan participants have the option to put money in the plan or receive the same amount as taxable cash compensation**. * aka **cash or deferred arrangement (CODA)**. * Contributions are permitted of up to **$22,500 annually for 2023** (indexed for inflation) plus catch-up contributions, which will be described later. Amounts contributed to the plan under these options are **not taxable to the participants until withdrawn**. * Aside from features related to the cash or deferred option, a traditional Section 401(k) plan is **much like a regular qualified profit-sharing plan**. * SIMPLE 401(k) plans and safe harbor 401(k) plans vary from the traditional arrangements in that each has a funding requirement. * However, such plans are exempt from the nondiscrimination testing that applies to traditional 401(k) plans.

Answer 57

A Section 401(k) plan can be structured for a business of any size, though it **may be more appropriate for larger companies that want to share plan funding with their employees**. The plan can be offered in the following circumstances: * When an employer wants to provide a qualified retirement plan for employees but can afford only minimal extra expense beyond existing salary and benefit costs. **Traditional 401(k) plans can be funded entirely from employee salary reductions, except for installation and administration costs**. **In most plans, however, additional direct employer contributions to the plan can enhance its effectiveness**. * When an employer is willing to meet a minimal funding requirement for nonhighly compensated employees and wants to maximize the contributions available to highly compensated employees without annual actual deferral percentage (ADP) testing. **A SIMPLE 401(k) plan or a safe harbor plan can offer many of the advantages of a traditional plan, without the nondiscrimination testing**. * When the employee group has one or more of the following characteristics: * **Many would like some choice as to the level of savings. That is, they would like a choice between various levels of current cash compensation and tax deferred savings. A younger, more mobile work force often prefers this option**. * Many employees are **relatively young** and have substantial time to accumulate retirement savings. * Many employees are willing to accept a degree of investment risk in their plan accounts in return for the potential benefits of good investment results. * **When an employer wants an attractive, savings-type supplement to its existing defined benefit or other qualified retirement plan**. Such a supplement can make the employer's retirement benefit program attractive to both younger and older employees by providing both security of retirement benefits and the opportunity to increase savings and investment on a tax-deferred basis. * **When the organization is a private taxpaying or tax-exempt organization**. * Governmental employers may not adopt Section 401(k) plans.

Answer 58

**The following details list the advantages of a Section 401(k) plan**: * As with all qualified plans, a Section 401(k) plan provides a tax-deferred retirement savings medium for employees. * A Section 401(k) plan **allows employees a degree of choice in the amount they wish to save under the plan. These amounts may be contributed both as dollar amounts and as percentages of payroll**. * The **employer's deduction for plan contributions is 25% of the total covered payroll of plan participants**. The deduction limit for the employer does not apply to elective deferral amounts. In other words, an employer may contribute and deduct up to 25% in addition to elective deferrals. * Traditional Section 401(k) plans can be funded entirely through salary reductions by employees. As a result, an employer can adopt the plan with no additional cost for employee compensation because the **only extra cost is plan installation and administration**. **The plan may actually result in some savings as a result of lower state or local, but not federal, payroll taxes**. * **Plan lump-sum distributions may be eligible for special tax treatment**. * **In-service withdrawals by employees for certain hardships are permitted**. * These are **not typically available in qualified pension plans**, **however, a pension plan may offer in-service distributions for participants having attained age 62**.

Answer 59

A Section 401(k) plan is **subject to contribution limits and restrictions on tax deductions**. Its disadvantages are: * As with all defined contribution plans except target plans, account balances at retirement age may not provide adequate retirement savings for employees who entered the plan at later ages. * **The annual employee salary reduction under the plan is limited to $22,500 (2023)**. However, **employees aged 50+ as of the end of the plan year may supplement this amount with catch-up contributions of $7,500 (2023)**. In addition, employers may make matching or nonelective contributions to provide additional tax-deferred savings. * **Due to the ADP nondiscrimination test described later, a Section 401(k) plan can be relatively costly and complex to administer**. **Safe harbor 401(k) plans and SIMPLE 401(k) plans are not subject to this test. However, both require that certain contribution requirements be made to certain non-highly compensated employees**. * Employees bear investment risk under the plan. However, they can also potentially benefit from good investment results. * Do you feel the advantages of a 401(k) plan outweigh the disadvantages? Does your employer offer a 401(k) plan? If your employer offers a 401(k) plan, are you participating in it? If not, why not? **Practitioner Advice:** * Many employers offer a 401(k) plan with matching contributions. * Some employers even match dollar for dollar up to a certain limit. * Believe it or not, many employees do not take advantage of the "free money" that their employers are making available. * **Employees should at least contribute up to the matching level that the employer provides**. * This is a financial planning recommendation that almost always makes sense.

Answer 60

**All elective deferrals from all employer plans that cover the employee must be aggregated, with the exception of Section 457 plans. The total is subject to a limit of $22,500 as indexed for 2023**. Virtually all 401(k) plans are funded entirely or in part through salary reductions elected by employees. An alternative sometimes used is for the employer to provide all employees with an annual bonus that employees can either receive in cash or contribute to the plan. In substance, both approaches are the same, but the **salary reduction approach is more popular because it uses existing salary scales as a starting point**. **Employees must elect salary reductions before compensation is earned**, that is before they render the services for which compensation is paid. **Salary reductions elected after compensation is earned are ineffective as a result of the tax doctrine of constructive receipt**. The usual practice is to provide plan participants with a salary reduction election form that they must complete before the end of each calendar year. In the alternative, the plan may provide for a negative election, under which a fixed percentage of each employee's salary is contributed unless he or she elects not to participate, so long as each eligible employee is afforded the opportunity to receive the amount as cash or as a contribution. In either event, the election specifies how much will be contributed to the plan from each paycheck received for the forthcoming year. Usually, the employee can reduce or entirely withdraw the election for pay not yet earned if circumstances dictate. The plan must restrict each participant's salary reductions to no more than the annual limits set forth in the Code. **The participant is always 100% vested in any salary reductions contributed to the plan and any plan earnings on those salary reductions**. Even if a participant leaves employment after a short time, his portion of his plan account attributable to salary reductions cannot be forfeited. **Usually plan account balances are distributed in a lump sum when a participant terminates employment**. Salary reductions, as well as any other plan contribution that the employee has the option to receive in cash, which is referred to as elective deferrals, are subject to an annual limit. The employee must add together each year all elective deferrals from the following: * Section 401(k) plans * salary reduction SEPs (SARSEP), which are available if established before 1997 SIMPLE IRAs, and Section 403(b) tax-deferred annuity plans. **Note: Elective deferrals to a Section 457 plan are not aggregated with other elective deferrals**. In addition to the foregoing salary reductions, e**mployees, age 50 and above, participating in a Section 401(k) plan, SARSEP, Section 403(b) plan, or Section 457 plan who have reached age 50+ during the plan year may be able to make catch-up contributions of $7,500 (2023) per year. SIMPLE IRA plans allow a $3,500 (2023) catch-up contribution per year**. **Note that the limit will be lower if the amount of a participant's compensation, after reduction for other elective deferrals, is less than the catch-up amounts**.

Answer 61

**Plans may include (or existing plans may be amended to include) Roth 401(k) contributions**. 403(b) plans may also allow Roth 403(b) contributions. **Roth elective deferrals will allow the plan participants to allocate all or a portion of their elective deferrals on an after-tax basis**. If a plan offers Roth contributions, **participant's contributions can be traditional (pre-tax), Roth (after-tax) or a combination of both**. The maximum contribution limit applies to the aggregation of both types of employee elective deferrals. Segregated from other pre-tax deferrals (and employer matching contributions and forfeitures) the g**rowth and income from Roth contributions are tax-sheltered but can be withdrawn tax-free if certain conditions are met**. **Like a Roth-IRA, contributions are made with after-tax dollars. When ultimately withdrawn from the plan, those dollars will not be taxed. All gains attributable to those dollars will grow in the plan tax-sheltered**. **Once the Roth contributions have met the five-year rule, the gains can be withdrawn tax-free as long as they are taken after age 59 ½ or following death or disability**. Plans may or may not allow Roth (k) contributions however, if a plan allows Roth contributions, it must allow traditional contributions. **Employer matching contributions and forfeitures must be segregated**. **Roth-401(k) contributions will be subject to the Required Minimum Distribution rules at age 73**.

Answer 62

There are some **unique distribution rules for Roth 401(k) money that contrast sharply with Roth IRA rules**. **Withdrawals of less than the full amount of the account are made pro-rata with a portion of each withdrawal being taxable and tax-free**. * This is **markedly different than the Roth-IRA distribution FIFO rules**. Direct Transfers from a Roth 401(k) to another Roth 401(k) plan are permitted. However, if a distribution (rather than a direct transfer) of Roth 401(k) money is taken, only the un-taxed gains can then be rolled over to another Roth 401(k) plan within sixty days. The post-tax contributions cannot be rolled over. Naturally, the new plan must allow for the acceptance of Roth 401(k) contributions. **If loans from a Roth 401(k) should default, the outstanding balance will be treated as a non-qualified distribution and any earnings distributed are fully taxable and subject to a 10% excise tax**. For this reason, every effort should be made to repay an outstanding loan from a Roth 401(k) plan rather than allowing it to default. **The Five-Year Rule** - Frankie begins Roth 401(k) contributions in October, 2019. 2019 becomes year 1. As of December 31, 2023, Frankie will meet the five-year rule. He may now withdraw the gains on his Roth 401(k) account tax-free after 59 ½ or disability or his beneficiary will receive them tax-free following his death. **Practitioner Advice:** * **It may be advisable to directly transfer Roth 401(k) assets to a Roth-IRA before taking withdrawals**. * Then **the more favorable FIFO withdrawal rules will apply**. * This **also helps avoid mandatory withdrawals at age 73**. * **To avoid Required Minimum Distributions of Roth 401(k) accounts, the participant can directly transfer them to a Roth-IRA account prior to age 73**. * **Roth IRA accounts are not subject to mandatory withdrawals at 73**. * However, **there's a "tax trap" here to be careful of**. * **If the receiving Roth IRA is established at that point in time, a new five-year rule will have to be satisfied before untaxed gains can be withdrawn tax-free, even though the five-year rule was satisfied in the 401(k) plan**. * **It would be wise for the participant to have anticipated this and started a Roth IRA at least five years prior to rolling the Roth 401(k) money in**.

Answer 63

**As part of the Pension Protection Act of 2006, employers may choose to add an Automatic Enrollment option to 401(k) plans**. Sometimes referred to as **Negative Election, this option reverses the concept of how employees begin making contributions to a 401(k) plan**. Normally, when an employee becomes eligible to make elective deferrals to the 401(k) plan, he or she must actively request that deductions be made from their payroll and contributed to the plan. * **With Automatic Enrollment, the contributions begin automatically unless the employee specifically chooses not to begin contributing**. * Automatic enrollment begins at 3% for the first year and will increase to 4% in the second year, 5% in the third year and 6% in the fourth year. **The employee is free at any time to either modify their contribution amount or stop it altogether**. This provision follows through only if the employee does nothing. Lauren began working for Principal Trucking eight months ago. In four months, she becomes eligible to begin contributions (elective deferrals) to the company's 401(k) plan. If the plan did not have an Automatic Enrollment feature, unless Lauren took specific action to begin contributing to the 401(k) plan, she would not take advantage of the plan. If Principal Trucking's plan did contain an Automatic Enrollment feature, in four months, when Lauren becomes eligible, payroll deductions equal to 3% of her gross pay would be deducted and contributed to the 401(k) plan. Again, if Lauren took no action, the payroll deduction would increase from 3% to 4% one year later and again from 4% to 5% a year after that. In the following year, the last automatic increase from 5% to 6% would occur. Lauren is free at any time to change her contribution to a higher or lower amount or to stop her contributions if she wishes. She just has to take action to do something different. **The addition of Automatic Enrollment coupled with an employer matching arrangement that matches 100% of the first 1% contributed by the employee and 50% of other contributions up to 6% of pay will allow the plan to satisfy the ADP and ACP test as well as the Top Heavy Test**.

Answer 64

**SIMPLE 401(k) plans are subject to a lower annual elective deferral limit but must be coordinated with the other elective deferrals described previously. The limit for 2023 is $15,500**. **The age 50+ catch-up allowance is $3,500 (2023)**. Note that the limit will be lower if the amount of a participant's compensation, after reduction for other elective deferrals, is less than the catch-up amounts. **Salary reductions under a Section 457 deferred compensation plan maintained by a government or non-profit employer are not coordinated with other elective deferrals**. A plan may permit employees to make voluntary contributions to a deemed IRA established under the plan. **Amounts so contributed reduce the limit for other traditional or Roth IRA contributions**. As is the case with elective deferrals and other IRA contributions, the contributions under this provision may also count toward the nonrefundable credit for lower-income taxpayers.

Answer 65

Many Section 401(k) plans provide matching or nonelective employer contributions **in order to encourage employee participation and make the plan more valuable to employees**. In fact, in the case of safe harbor 401(k) plans and SIMPLE 401(k) plans, the Code requires that the terms of the plan provide for certain matching or nonelective contributions. Section 401(k) plans typically use one or more of the following types of employer contributions: * Formula matching contributions * Discretionary matching contributions * Pure discretionary or profit sharing contributions * Formula contributions Employer matching contributions are subject to the same vesting requirements as are applied to top-heavy plans. The vesting requirements are 100% cliff vesting after three years or graded vesting starting with 20% after two years, increasing by 20% each year until 100% is reached after six years.

Answer 66

The **employer matches employee salary reductions, either dollar for dollar or under another formula.** For example, the plan might provide that the employer contributes an amount equal to 50% of the amount the employee elects as a salary reduction. So, if an employee elected a salary reduction of $6,000, the employer would put an additional $3,000 into the employee's plan account.

Answer 67

Under this approach, the **employer has discretion to make a contribution to the plan each year**. * The **employer contribution is allocated to each participant's plan account in proportion to the amount elected by the participant as a salary reduction during that year**. * For example, at the end of a year the employer might decide to make a discretionary matching contribution of 40% of each participant's salary reduction for the year. Thus, if a participant had salary reductions of $5,000 for that year, the employer would contribute another $2,000 to that participant's account.

Answer 68

The **employer makes a discretionary nonelective contribution to the plan that is allocated simply on the basis of each employee's compensation, without regard to the amount of salary reductions elected by that employee**. * For example, at the end of a year the employer might decide to contribute another $100,000 to the plan. This **contribution would be allocated to plan participants' accounts in the same manner as a discretionary profit sharing contribution**.

Answer 69

An example of formula contributions is a plan that might provide that the employer will contribute 3% of compensation to the plan for employees whose annual compensation is less than $50,000. So, for an employee who earned $30,000, the employer would contribute 3%, or $900, to that employee's plan account.

Answer 70

**Direct nonelective employer contribution provisions in Section 401(k) plans are usually intended to help the plan satisfy the ADP test, or may be selected under one of the permissible arrangements for a safe harbor or SIMPLE 401(k) plan.** The plan designer will use whatever contribution provision best meets the objectives of the employer and the requirements of the Code, given the group of employees covered under the plan. **Nonelective employer contributions can be used to help meet the ADP test only if they are immediately 100% vested and are subject to the same withdrawal restrictions applicable to elective deferrals**. * These are referred to as **qualified nonelective contributions (QNECs)**. Section 401(k) plans can also provide for nonelective employer contributions that are not intended to be counted in the ADP test. The advantage of these contributions is that such employer contributions need not be 100% vested. Graded vesting under the three- to seven-year provision is permitted, although many employers offer faster vesting. **Graded vesting reduces employer costs for the plan as employees who leave employment before they are fully vested forfeit the nonvested part of their account balances. These forfeitures can then be used to reduce future employer contributions or, more commonly, can be redistributed to remaining participants' accounts in the plan. Forfeitures cannot be repaid to the employer in cash in any qualified plan**.

Answer 71

Distributions from Section 401(k) plans are subject to the qualified plan distribution rules of the Code. **Most plans provide for distributions in a lump sum at termination of employment.** Section 401(k) plans can allow participants to **make in-service withdrawals**, that is, **withdrawals before termination of employment**. However, there are a variety of restrictions that reduce the availability of such distributions to employees. These **restrictions apply whether the plan is a traditional, safe harbor or SIMPLE 401(k) plan**. There is a **special rule that Section 401(k) account funds attributable to elective deferrals cannot be distributed prior to occurrence of one of the following**: * Retirement, * Death, * Disability, * Severance from employment with the employer, * **Attainment of age 59 1/2 by the participant**, * **Plan termination if the employer has no other defined contribution plan other than an ESOP**, or * **Hardship**. Many pre-retirement distributions will **not only be taxable, but will also be subject to the 10% early withdrawal penalty tax. A 10% penalty tax applies to the taxable amount, that is, the amount subject to regular income tax, of any qualified plan distribution, except for distributions**: * After **age 59½**, * On the employee's death, * Upon the employee's disability, * That are part of a joint or life annuity payout following separation from service, * That are paid after separation from service after attaining age 55, or * **That do not exceed the amount of medical expenses deductible as an itemized deduction for the year**. From this list, it is evident that many hardship distributions from a Section 401(k) plan, though permitted by the terms of the plan, **will be subject to the 10% penalty tax.** **Many Section 401(k) plans have provisions for plan loans to participants. A plan loan provision may be extremely valuable to employees because it allows them access to their plan funds without the hardship restriction or the 10% penalty tax**.

Answer 72

A Section 401(k) plan must meet certain tests and requirements to qualify for tax benefits. The tax implications of a Section 401(k) plan are as given below: * **Employee elective deferrals, that is, salary reductions up to the annual limit, are not subject to income tax to the employee in the year of deferral. The limit is $22,500 (2023)** plus any permitted catch-up contributions. However, **elective deferrals are subject to Social Security tax for the employee**. In other words, even though the salary has been **deferred for income tax purposes, it is treated as received for Social Security purposes**. * **Employer matching and nonelective contributions to a traditional or safe harbor 401(k) plan are deductible by the employer** for federal income tax purposes **up to a limit of 25% of the total payroll of all employees covered under the plan**. * **Elective deferrals, but not nonelective employer contributions, are subject to the Social Security Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) payroll taxes**. The impact of state payroll taxes depends on the particular state's law. Both elective deferrals and nonelective employer contributions may be exempt from state payroll taxes in some states. * Whether the 401(k) plan is a traditional, SIMPLE or safe harbor plan, it is subject to the limits of Code Section 415. **The annual additions to each participant's account is limited to the lesser of**: * **100% of compensation, or** * **$66,000 (2023)** Annual additions include the total of: * Nonelective employer contributions to the participant's account * Salary reductions or other elective deferrals contributed to the account * Forfeitures from other participants' accounts, and * After-tax employee contributions to the account. **Distributions from the plan to employees are subject to income tax when received.** * Lump-sum distributions may be eligible for special tax treatment.

Answer 73

**Elective deferrals in a traditional 401(k) plan must meet a special test for nondiscrimination, the ADP test**. * No ADP testing is necessary in the case of a SIMPLE 401(k) plan or a safe harbor plan. * **To meet this requirement, the plan must satisfy, in actual operation, one of two alternative ADP tests as follows**: * The ADP for eligible highly compensated employees for the plan year is not more than the ADP of all other eligible employees for the preceding plan year multiplied by 1.25. * The ADP for eligible highly compensated employees for the plan year does not exceed the ADP for other eligible employees for the preceding plan year by more than 2% and the ADP for eligible highly compensated employees for the plan year is not more than the ADP of all other eligible employees for the preceding plan year multiplied by two. **This ADP testing method is referred to as prior-year testing**. As an alternative, the ADP for non-highly compensated employees for the current plan year may be used under either test, but certain restrictions apply to a plan that uses current year testing and later wishes to change to prior year testing. No special restrictions apply to employers wishing to change from prior year testing back to current year testing. **For example, if the ADP for non-highly compensated employees is 3%, the ADP for highly compensated employees could be as high as 5% (3% plus 2%), using prior year testing**. This meets the second test. The plan document must state whether the plan uses current-year testing or prior-year testing. Highly compensated employee is defined for this and all qualified plan purposes as an employee who: * Was during the current or preceding plan year, a greater-than-5% owner of the employer, or * **Received compensation for the preceding year from the employer over $150,000 (2023) and was in the top-paid group for the preceding year**, if the employer elects the use of such a provision. **The top-paid group election allows employers to include only employees ranked in the top 20% of payroll for testing purposes**.

Answer 74

**Adding Safe Harbor provisions to a 401(k) plan will eliminate the need for the ADP/ACP test thus allowing highly compensated employees to contribute the maximum elective deferral amount**. * Safe Harbor provisions **can only be added to a plan at the beginning of a new plan year**, after providing employees with advance written notice of the change. * **These provisions require the plan to provide either a minimum matching contribution or a non-elective contribution for all eligible employees**. * Additionally, the matching contributions or the non-elective contributions must be immediately vested. **The employer must provide one of these options plus immediate vesting under Safe Harbor 401(k) provisions**: * **Matching Contributions must equal 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions**, or * **Non-Elective Contributions for all eligible employees equal to 3% of their compensation**. **Practitioner Advice:** * **The employer must announce (in writing) which of the two options will be used for the year. This eliminates the employer's ability to simply select the option that will cost less**. * If all employees contribute at least 5% to the plan, then the non-elective option would be cheaper for the employer. * However, if most employees were not contributing to the plan, the matching formula would be less costly. * Thus the employer must declare first.

Answer 75

**A target or other age-weighted formula for a defined contribution plan allows higher contribution levels, as a percentage of compensation, for older plan entrants**. * That is, **the formula for annual employer contributions or allocations to participant accounts is based not only on the participant's compensation but also on the participant's age on entering the plan**. Age-weighting permits adequate account balances to build up in the relatively short time available to older entrants before retirement. In addition, with an age-weighted formula, **the employer's plan contributions tend to be weighted toward owners and key employees as in many businesses these employees will be older than rank-and-file employees when the plan is adopted**. Three broad types of age-weighted plans can be identified: * **The traditional target plan is an age-weighted money purchase pension plan**. The **employer must make regular annual contributions at the rate specified in the plan**. * In some ways, a traditional target plan is a **hybrid between a defined contribution pension plan and a defined benefit plan**, as the funding of each participant's account is aimed at producing a target amount at retirement, like a defined benefit plan. However, as the plan is a defined contribution plan, the actual benefit is the amount in each participant's account at retirement. The plan participant assumes the investment risk. * **The age-weighted profit sharing plan is a profit sharing plan with an age-weighted factor in the allocation formula**. Like all profit sharing plans, the **employer's annual contribution can be discretionary, so the participants have no assurance of a specific annual funding level**. However, as the plan **allocations are age-weighted, older plan entrants are favored**. * The **cross-tested plan represents an attempt to push age-weighting to its maximum limit under the cross-testing provisions of the proposed nondiscrimination regulations under Code Section 401(a)(4)**.

Answer 76

The target/age-weighted plan may be offered to employees in organizations where the following is applicable: * When the features of a regular defined contribution plan would be attractive to the employer, except that **there are older employees whose retirement benefits would be inadequate because of the relatively few years remaining for participation in the plan**. The age-weighted formula **allows proportionately greater employer contributions for these older employees, that is, greater percentages of their compensation**. * When the **employer is looking for an alternative to a defined benefit plan that provides adequate retirement benefits to older employees but has the lower cost and simplicity of a defined contribution plan**. * When an **employer wants to terminate an existing defined benefit plan in order to avoid the increasing cost and regulatory burdens associated with these plans**. If an age-weighted plan is substituted for the defined benefit plan, **in many cases the new plan will provide approximately the same benefits to most employees, and it will be relatively easy to obtain IRS approval for the defined benefit plan termination**. * When a **closely held business or professional corporation has key employees who are approximately age 50 or older and who generally want to contribute less than the annual additions dollar limit of $66,000 (2023)**. The age-weighted plan is generally the ideal qualified plan to adopt in this situation. **Given the $66,000 (2023) annual limit, its benefit level is just as high as would be available in a defined benefit plan but is much simpler and less expensive to install and administer**.

Answer 77

The target/age-weighted plan is intended to provide employees with a certain amount upon retirement. The following are the advantages of target/age-weighted plan: * **Retirement benefits can be made adequate for employees who enter the plan at older ages**. The following comparison of a target benefit plan with a money purchase plan illustrates this. The illustration shows how the annual contribution and retirement benefit vary for three employees, each earning $30,000 annually: * **From the viewpoint of a business owner, particularly in a small, closely-held business, the feature illustrated in the paragraph above also means that in an age-weighted plan, more of the total employer contributions in the age-weighted plan will likely be allocated to owners and key employees, as compared with a money purchase or other defined contribution plan**. This will be the case if the owners and key employees are older than the average of all employees when the plan is adopted. Annual Contributions Accumulation at 65 (5½% return) * Employee age at entry Money Purchase (14%) Target Money Purchase Target * 30 $4,200 $1,655 $444,214 $175,000 * 40 $4,200 $3,243 $226,657 $175,000 * 50 $4,200 $7,402 $99,292 $175,000 * As with all qualified plans, an age-weighted plan **provides a tax-deferred retirement savings medium for employees**. * The age-weighted plan is **relatively simple and inexpensive to design, administer and explain to employees**. An age-weighted plan is especially simple compared to a defined benefit plan because **actuarial valuations and an enrolled actuary's certification are not required**. Yet the plan's benefits can be much the same as those from a defined benefit plan. **In contrast, a target benefit plan or a cross-tested plan does require actuarial services**. * Individual accounts for participants allow participants to benefit from good investment results in the plan fund.

Answer 78

The disadvantages of a target/age weighted plan are: * As with any defined contribution plan, **the annual addition to each employee's account is limited to the lesser of**: * **100% of compensation**, or * **$66,000(2023)**. * While this increased limit dramatically increased the funding opportunities for younger and lower-paid employees, it still limits the relative amount of funding for highly compensated employees. **For older employees, a defined benefit plan may allow a much higher level of employer contributions to the plan**. * Employees bear investment risk under the plan. While this is a disadvantage to employees, it also **tends to reduce employer costs compared to a defined benefit plan**. This is **because the employer bears the investment risk in a defined benefit plan**. * A target pension plan is subject to the Code's minimum funding requirements. Employers are obligated to make minimum contributions each year under the plan's contribution formula or be subject to minimum funding penalties. **While an age-weighted or cross-tested profit-sharing plan is not subject to the minimum funding requirements, contributions must be recurring and substantial**. * **If the age-weighted plan is a profit-sharing plan, the ultimate benefits to participants are particularly uncertain as the employer is not necessarily committed to any specific funding level and may even omit funding in some years**. * In the case of a target pension plan or a cross-tested plan, actuarial services are needed on an annual basis.

Answer 79

**The formula for employer contributions to a target plan requires the employer to contribute annually to each plan participant's account. The annual contribution is a percentage of each employee's annual compensation, with the percentage varying according to the age of the employee when that employee first entered the plan**. **Compensation must be defined in the plan in a manner that does not discriminate in favor of highly compensated employees. Only the first $330,000 (2023) of each employee's compensation can be taken into account**. There are **two basic steps in designing the formula that specifies the percentage of each participant's contribution that the employer will contribute annually**: * The **employer chooses a target level of retirement benefits as a percentage of annual compensation**. For example, the employer might want the plan to aim for an annual retirement benefit of 50% of preretirement compensation for all participants. * The **plan designer chooses actuarial assumptions to determine how much must be contributed for each participant in order to provide the targeted level of benefit**. * Actuarial assumptions must be made with respect to: * A rate of investment return on plan assets, * The cost of an annuity at age 65 involving postretirement mortality and investment return, and * The form of the benefit, such as straight life annuity, joint and survivor annuity and so forth. These actuarial assumptions are developed into a table of contribution percentages that are incorporated into the target plan. **Contribution percentages derived from the table are then applied to each employee's annual compensation to determine the annual employer contribution**. The **percentage for each employee is determined when the employee enters the plan and remains the same thereafter**. It does not increase each year. Also, the percentages remain the same even if investment results are higher or lower than the initial assumptions. **Unlike a defined benefit plan, there are no periodic actuarial valuations. The participant gets the benefit of good investment results and bears the risk of poor results**. An illustrative contribution table is below. Target benefit: 10 percent of compensation Normal retirement age: 65 Benefit form: Straight life annuity Assumed investment return: 8% preretirement, 6% postretirement Postretirement mortality: UP 84 unisex contribution made on last day of year

Answer 80

An illustrative contribution table is below. Target benefit: 10 percent of compensation Normal retirement age: 65 Benefit form: Straight life annuity Assumed investment return: 8% preretirement, 6% postretirement Postretirement mortality: UP 84 unisex contribution made on last day of year Years to retirement Annual employer contribution (percentage of compensation) Years to retirement Annual employer contribution (percentage of compensation) 1 96.01 19 2.32 2 46.16 20 2.10 3 29.57 21 1.90 4 21.31 22 1.73 5 16.37 23 1.58 6 13.09 24 1.44 7 10.76 25 1.31 8 9.03 26 1.20 9 7.69 27 1.10 10 6.63 28 1.01 11 5.77 29 0.92 12 5.06 30 0.85 13 4.47 31 0.78 14 3.96 32 0.72 15 3.54 33 0.66 16 3.17 34 0.61 17 2.84 35 0.56 18 2.56

Answer 81

The target benefit table is not the only possible table, as different actuarial assumptions can be used. There are some limits on possible actuarial assumptions: * **The table must be a unisex table, that is, the same for both males and females**. Current law prohibits plan contribution rates based on sex, as this would result in different benefits at retirement for males and females. **Sex-based actuarial assumptions can be used in defined benefit plans because there they do not affect the amount of benefit a participant receives, only the amount of the employer's cost**. * Actuarial assumptions must be reasonable. * The **investment return assumption must not be less than 7.5% or more than 8.5%**. Regulations provide that a target benefit plan will be deemed to meet the nondiscrimination requirements if it satisfies a specified safe harbor and certain other conditions are met. For example, Archer Co. adopts a target plan with a target benefit of 50% of compensation. Using the above table, and based on the employee data below, annual employer contributions are computed. The contribution percentages for a target of 50% of compensation are just five times those provided in the table for a target of 10% of compensation. Thus the table can be used for any target level by scaling the percentages up or down proportionately. * For Employee A, who has 35 years remaining until retirement, the annual contribution percentage is five times 0.56%, or 2.8% of compensation. (See contribution table on previous page for annual employer contribution.) * Employee Age at entry Compensation Annual contribution * A 30 $30,000 $840 * B 50 $30,000 $5,310 * C 30 $60,000 $1,680 * D 50 $60,000 $10,620

Answer 82

It is very important that the **Section 415 annual additions limit be kept in mind with respect to target contributions**. This **limit, which applies to all defined contribution plans, restricts annual additions to each participant's account to the lesser of**: * **100% of compensation**, or * **$66,000 (2023)**. For example, suppose Archer Co. in the previous example employs Hood, who enters the plan at age 55 and earns $300,000 in 2023. The compensation percentage specified from the table for Archer Co.'s 50% target benefit is 33.15% (5 x 6.63%). This would dictate an annual contribution of $99,450. However, the company can contribute only $66,000 (2023) annually to Hood's account, because of the annual additions limit. **An employee in a situation like Hood's is losing benefits because the plan is a defined contribution plan subject to the annual additions limit**. * **If the plan were a defined benefit plan, it could provide a 50% of compensation retirement benefit that could be fully funded by the employer, because the annual additions limit for defined contribution plans would not apply**. **Hood's situation in the example may be typical of owners or key employees in closely held businesses**. * **This illustrates the major tradeoff in adopting a target benefit plan instead of a defined benefit plan**. * The **target plan is simpler and less expensive, but the upper limit available for tax-deferred retirement savings is reduced**.

Answer 83

Although the target in a target plan is a retirement benefit similar to that provided in a defined benefit plan, **a target plan actually provides a benefit like other types of defined contribution plans, particularly a money purchase plan**. For example, suppose a participant retires from a company having a target plan with a target of 50% of compensation. **The purpose of the target was only to determine the level of employer contributions**. **The benefit this retiree receives actually has no direct relation to his compensation**. **As with any other defined contribution plan, his benefit is equal to the amount built up in his account as a result of**: * Employer contributions, * Forfeitures from other employees' accounts, and * Interest, capital gains and other investment returns realized over the years on plan assets. **As a condition of qualification, a target benefit plan must provide for a qualified joint and survivor annuity as its automatic benefit unless waived by the participant, with the consent of his spouse**. * If the automatic form of benefit is waived, **account balances may be paid at retirement in installments over a period of years, in a lump sum or other annuity**. Options may be provided whereby the retiree can convert the amount in his or her account to an equivalent life or refund annuity.

Answer 84

**Vesting and investment features of target plans are similar to those for money purchase plans**. Target benefit contribution formulas **can be integrated with Social Security**. In the past, this was frequently done. The applicable rules were a combination of those applicable to defined benefit and to money purchase plans. Under the nondiscrimination regulations, target plans generally must apply the rules for defined benefit plans to the target formula.

Answer 85

**An age-weighted profit sharing plan is one that relates allocation percentages to age, thus resulting in a higher allocation for a participant who enters the plan at a later age**. * According to the cross-testing concept, if the age-weighting is done properly, **benefits at retirement age will be nondiscriminatory as a percentage of compensation because the older entrant has fewer years to accumulate allocations**. **Many employers today are reluctant to adopt plans that have a recurring annual contribution obligation, such as a defined benefit plan or defined contribution pension plan whether it is a money purchase pension plan or a target benefit pension plan**. * **Therefore, the use of the age-weighting or cross-testing concept within a profit sharing plan is currently very attractive**. To see how a simple age-weighted profit sharing plan works, consider a case study. Sppose Dot Matrix, aged 55, owns a software consulting business with profits that vary greatly from year to year. However, she wants to save at least $20,000 annually, preferably sheltered in a retirement plan. She has one employee, Arthur Data, aged 25. This year Dot's compensation, that is, all the net income of the corporate business, is $160,000. Data's salary is $30,000. As a planner, you suggest an age-weighted profit sharing plan because it meets Dot's requirements: * The **ability to vary contributions from year to year or skip contributions in a bad year**, and * The **weighting of the allocation in favor of Dot because of her age**. * Click here to view the table to make calculations for an age-weighted plan. **From the Annuity Purchase Factors table**, we see that a life annuity of one dollar per month at age 65 requires a fund of $95.38 at age 65. If Data receives a life annuity of one dollar per month at age 65, Dot can receive a nondiscriminatory benefit of $5.33 at age 65. This is because her compensation is five and one/third times Data's. So the accumulation at age 65 is 5.33 times $95.38, or $508.38. **From the Discount Factors table**, the $95.38 accumulation for Data requires a contribution of $3.65 annually [$95.38 X 0.038266 (factor for 40 years to retirement)]. * The contribution for Dot is correspondingly $224.85 annually [$508.38 X 0.442285 (factor for 10 years to retirement)]. **Whatever contribution is made to the plan, under this age-weighting, the amount of the contribution will be allocated in the ratio of $224.85 (Dot) to $3.65 (Data)**. * If we allocate $24,000 for Dot for this year, this indicates that Data's allocation will be $389.59 [$24,000 X $3.65/$224.85]. * This **age-weighted allocation would provide Data with less than the top-heavy minimum contribution of 3%, so the actual contribution for Data will be 3% of his compensation of $30,000, or $900**. A comparison of the age-weighted plan with some alternatives shows its advantages: Employee Compensation Regular Profit Sharing Plan Integrated Profit Sharing Plan Age weighted P-S Plan Dot $ 160,000 $ 24,000 $ 24,000 $ 24,000 Data $ 30,000 $4,500 $ 3,510 $ 900 % for Dot 84.2% 87.2% 96.4%

Answer 86

As a qualified plan, the IRC gives target/age-weighted plans favorable tax treatment. The tax implications of target/age-weighted plans are: * **Employer contributions to an age-weighted plan are deductible when made**, so long as the plan remains qualified. A plan must meet eligibility, vesting, funding (for target benefit pension plan) and other requirements to be qualified. * Assuming the plan remains qualified, **taxation of the employee on plan contributions is deferred. Both employer contributions and earnings on plan assets are nontaxable to plan participants until withdrawn**. * Annual additions to each participant's account are limited to the lesser of: * 100% of the participant's compensation, or * $66,000(2023). * Annual additions include: * Employer contributions to participants' accounts, * Forfeitures from other participants' accounts, and * Employee contributions to the account. * Distributions from the plan must follow the rules for qualified plan distributions. Certain premature distributions are subject to penalties. * **A target pension plan, but not an age-weighted profit-sharing plan, is subject to the minimum funding rules of Section 412 of the Code**. This requires minimum annual contributions, subject to a penalty imposed on the employer if less than the minimum amount is contributed. **For a target benefit plan, the minimum funding requirement is generally the amount required under the plan's contribution formula**. The minimum funding requirement, therefore, will be satisfied so long as the employer contributes to each participant's account the percentage of compensation required by the plan. * **Certain employers may be eligible for a business tax credit to offset qualified plan startup costs**. * A **plan may permit employees to make voluntary contributions to a deemed IRA established under the plan**. Amounts so contributed reduce the limit for other traditional or Roth IRA contributions. * The plan is subject to the **ERISA** reporting and disclosure rules.

Answer 87

A comparison of these alternative plans with the target/age-weighted plan reveals the following: * **Defined benefit plans provide more benefit security because of the employer and government guarantee of benefit levels**. Defined benefit plans **also allow greater tax deductible employer contributions for older plan entrants who are highly compensated, because the annual additions limit does not apply**. However, defined benefit plans are **more complex and costly to design and administer**. * **Money purchase plans** offer an alternative similar to target plans, but **without the age-related contribution feature**. * **Nonqualified deferred compensation plans** can be provided exclusively for selected executives. However, with those plans the **employer's tax deduction is generally deferred until benefit payments are made**. This can be as much as 20 or 30 years after the employer's contribution is made. * **Individual retirement savings** is available as an alternative or supplement to an employer plan, but the amounts may be subject to deduction and deferral limits.

Answer 88

* **Section 401(k) Plan** is a plan under which employees can **make either tax deductible or after-tax Roth contributions by electing salary reductions**. These **can be set up as part of a profit sharing plan, with both the employer and the employee contributing to the plan, or with only the employee making a contribution**. Employers often match employee salary reductions in order to encourage employee participation in these plans. Traditional employee's contributions to the plan and the earnings on those contributions are tax-advantaged, with **all taxes being deferred until retirement withdrawals are made**. **Roth 401(k) contributions are no tax advantaged when contributed but may be withdrawn along with gains tax free** if certain conditions are met. Also, 401(k) plans usually offer a wide variety of investment options, with a **minimum of three that must be offered**. * **Target benefit pension plan** is similar to a money purchase plan in that the **employer must make annual contributions to each participant's account under a formula based on compensation**. In a target plan, however, the **participant's age at plan entry is also taken into account in determining the contribution percentage**. This is **done on an actuarial basis so that older entrants can build up retirement accounts faster**. The target provides approximately the same benefit level as a percentage of compensation for each participant at retirement. The **employer does not guarantee this level, however, and the employee bears the risk and also reaps the benefit of varying investment results**. * **Age weighted profit sharing plan** is a **profit sharing plan with an age-weighted factor in the allocation formula**. Like all profit sharing plans, the **employer's annual contribution can be discretionary, so the participants have no assurance of a specific annual funding level**. However, since the plan allocations are age-weighted, **older plan entrants are favored**. * **PRACTITIONER ADVICE** * **401(k) plans are usually built on to a profit sharing plan. Adding 401(k) provisions to a profit sharing plan meets the "substantial and recurring" standard thus relieving the employer of ever having to make any profit sharing contributions to the plan**.

Answer 89

The company already has a defined benefit plan that it wishes to supplement. The company's profits vary from year to year and flexibility in funding requirements is needed. The company wants to provide an incentive for employees to improve productivity. * A profit sharing plan is appropriate in a company whose profits vary from year to year. It is also offered by employers who want to adopt a qualified plan with an incentive feature as well as to supplement an existing defined benefit plan. It is suitable if many employees are relatively young and have substantial time to accumulate retirement savings. Therefore, a profit sharing plan would not be fitting for older employees who want to be assured of contributions or benefits at retirement.

Answer 90

$6,320 * A plan benefit formula that is integrated with Social Security avoids duplicating Social Security benefits already provided to the employee and reduces employer costs for the plan. * An integrated formula defines a level of compensation known as the integration level. * Employer contributions for compensation above the integration level are of a higher rate than the rate for compensation below the level. * Maxwell Inc.'s contribution to Matilda's account would be computed as follows: * 11% of the first $22,000 of total compensation: $2,420 * 15% of $26,000 ($48,000 compensation - $22,000 integration level): $3,900 * The employer contribution to Matilda's account this year: $6,320.

Answer 91

Savings plans are subject to the nondiscrimination requirement and must be monitored to see that the statutory tests are met. * Employer contributions to savings plans are deductible so long as the plan remains qualified, but employee contributions to the plan are not tax deductible. The savings plan must meet an actual contribution percentage test to be deemed nondiscriminatory.

Answer 92

If funded at the maximum permitted level, it can be counted on to provide adequate retirement savings for virtually all employees. It is always simple and inexpensive to administer. * With a Section 401(k) plan, account balances at retirement age may not provide adequate retirement savings for employees who entered the plan at later ages. Further, due to the ADP nondiscrimination test, a Section 401(k) plan can be relatively costly and complex to administer. The advantages are that it allows employees to choose the amount they wish to save. It also permits loans and hardship withdrawals and can be funded entirely through salary reductions.

Answer 93

Can be based on the participant's compensation and age on entering the plan. * A target or age-weighted defined contribution plan formula for annual employer contributions or allocations to participant accounts is **based on both the participant's compensation and age on entering the plan**. * **Relating allocation percentages to age results in higher allocation for older plan entrants**. * **Defined benefit plans have a recurring annual contribution obligation. Therefore, their contribution levels are higher than a target or age-weighted plan**.

Answer 94

None * Since Lou satisfied the five year and is withdrawing his gains following age 59 ½, all gains are tax-free. Contributions are always tax free since they were made with after tax dollars.

Answer 95

Upon completion of this lesson, you should be able to: * Identify the circumstances when defined benefit plans can be offered, * Describe the design features of defined benefit pension plans, * State the advantages and disadvantages of defined benefit pension plans, * Detail the tax implications of defined benefit pension plans, * Name the alternatives to defined benefit pension plans, * Define the structure of cash balance pension plans, * Enumerate the advantages and disadvantages of cash balance pension plans, * Explain the tax implications of cash balance pension plans, and * List the alternatives to cash balance pension plans.

Answer 96

**Estimated quarterly required contributions of Section 412(m) apply only to certain underfunded defined benefit pension plans, not defined contribution pension plans**. A defined benefit pension plan **may be offered by an employer in the following circumstances**: * When the **employer's plan design objective is to provide an adequate level of retirement income to employees regardless of their age at plan entry**. * When the **employer wants to allocate plan costs to the maximum extent to older employees, who are also often key or controlling employees in a closely held business**. * When** an older controlling employee in a small business, for instance a doctor or dentist in a professional corporation, wants to maximize tax-deferred retirement savings, especially for self benefit**.

Answer 97

**A defined benefit pension plan allows employers to contribute more than other retirement plans, with substantial, predictable retirement benefits**. The advantages of defined benefit pension plans are: * As with all qualified plans, employees obtain a **tax-deferred retirement savings medium**. * **Retirement benefits at adequate levels can be provided for all employees regardless of age at plan entry**. * **Benefit levels are guaranteed both by the employer and by the Pension Benefit Guaranty Corporation (PBGC)**. * **For an older highly compensated employee, a defined benefit plan generally will allow the maximum amount of tax-deferred retirement saving**.

Answer 98

A defined benefit pension plan is **complex in design and therefore entails additional administrative expenses for the employer**. The disadvantages of defined benefit pension plans are: * **Actuarial and PBGC aspects of defined benefit plans result in higher installation and administration costs than for defined contribution plans**. * Defined benefit plans are **complex to design and difficult to explain to employees**. * Employees who **leave before retirement may receive relatively little benefit from the plan**. The **plan generally lacks portability in that when an employee changes employment, it usually cannot go with him or her, but the employee can receive his or her vested benefits at retirement in the form of an annuity payout**. * The **employer is subject to a recurring annual funding obligation**. It **must be paid in quarterly or more frequent installments regardless of whether, in a given year, the company has made a profit or incurred a loss**. * The **employer assumes the risk of bad investment results in the plan fund**.

Answer 99

False. * Employees who leave before retirement may receive relatively little benefit from the Defined Benefit Plan. The plan generally lacks portability in that when an employee changes jobs, it usually cannot go with him or her. In addition, since FIX Company has a 5-year cliff vesting schedule, Gerardo would not be vested at all.

Answer 100

Defined benefit plans **provide a specified amount of benefit to the plan participant at the plan's specified retirement age, the normal retirement age**. There are many types of formulas for determining this benefit. The most common formulas can be summarized as: * The **flat amount**, * The **flat percentage**, and * The **unit credit types**.

Answer 101

**A flat amount formula provides simply a stated dollar amount to each plan participant**. For example, the plan might provide a pension of $500 per month for life, beginning at age 65, for each plan participant. Such a plan might require some minimum service to obtain the full amount, perhaps 10 or 15 years of service with the employer, with the benefit scaled back for fewer years of service. **A flat amount formula does not differentiate among employees with different compensation levels, so it would be appropriate only when there is relatively little difference in compensation among the group of employees covered under the plan**.

Answer 102

**Flat percentage formulas are very common**. They **provide a retirement benefit that is a percentage of the employee's average earnings**. * For example, the formula might provide a retirement benefit at age 65 equal to 50% of the employee's average earnings prior to retirement. * Under this formula, a participant whose average earnings were $100,000 prior to retirement would receive an annual pension of $50,000. Typically a plan will require certain minimum service, such as 10 or 15 years, to obtain the full percentage benefit, with the percentage scaled back for fewer years of service. * For example, assume that a plan provides a benefit of 50% of average compensation for an employee who retires with at least 10 years of service. * This plan might provide a benefit of only 25% of average compensation for an employee who retires at age 65 with only five years of service for the employer.

Answer 103

**A unit credit formula is based on the employee's service with the employer**. * For example, the formula might provide 1.5% of earnings for each of the employee's years of service, with the total percentage applied to the employee's average earnings. * Under this formula, a participant with average annual compensation of $100,000 who retired after 30 years of service would receive an annual pension of $45,000 (1.5 times 30, or 45% of $100,000). There are **two methods generally used to compute average earnings for these formulas**: * **The career average**, and * **The final average methods**.

Answer 104

Under the career average method, the **formula uses earnings averaged over the employee's entire career with the employer**. * The career average method **takes early and often low-earning years into account, and thus the total benefit may not fully reflect the employee's earning power at retirement**. * This is **less advantageous to an employee**.

Answer 105

**Under the final average method, earnings are averaged over a number of years, usually the three to five years immediately prior to retirement**. * The final average method usually produces a retirement benefit that is **better matched to the employee's income just prior to retirement**. In either a career average or final average formula, **a maximum of $330,000 (2023) of each employee's compensation is taken into account**. * In other words, an employee earning $400,000 in 2023 is treated as if their compensation were $330,000. * Also, **the defined benefit amount that is paid to the employee cannot exceed the Section 415 limit which will be discussed later**. In many plans, **these formulas are further modified by integrating them with Social Security benefits**. * Integrating the formula gives the employer some credit for paying the cost of employee Social Security benefits. * It helps to provide a reasonable level of retirement income for all employees by taking Social Security benefits into account. **Exam Tip:** * **On any exam, if asked what retirement plan is most appropriate for someone who wants a GUARANTEED BENEFIT at retirement, the answer is always a defined benefit plan, either the traditional or cash balance plan**.

Answer 106

**Employers must fund defined benefit plans with periodic deposits determined actuarially to insure that the plan fund will be sufficient to pay the promised benefit as each participant retires**. * The **objective is to accumulate a fund at the employee's retirement age that is sufficient to "buy an annuity" equal to the retirement benefit**. For example, suppose the actuary hired by the employer estimates that a pension of $50,000 per year beginning at age 65 is equivalent to a lump sum of $475,000 at age 65. In other words, for a given interest rate and other assumptions, the amount of $475,000 deposited at age 65 will produce an annuity of $50,000 per year for the life of an individual age 65. For a participant aged 45 at plan entry, the employer has 20 years to fund this benefit, that is, to build up a fund totaling $475,000 at age 65. The actuary will use various methods and assumptions to determine how much must be deposited periodically. As an illustration, a "level annual premiums" method with a 6% interest assumption would require the employer to deposit $12,180 annually for 20 years in order to build up a fund of $475,000. This shows how investment return works for the benefit of the employer; the 20 deposits of $12,180 total only $243,600, but at age 65 the fund will actually total $475,000 if all annual deposits are made and the fund earns a 6% investment return annually. **Actuarial methods and assumptions are chosen to provide the desired pattern for spreading the plan's cost over the years it will affect**. * The actuarial method and assumptions often have to be adjusted over the years to make sure that the fund is adequate. * It is even **possible for a defined benefit plan to become overfunded, in which case the employer contributions must be suspended over a time**. The actuarial funding approach for defined benefit plans means that, **for a given benefit, the annual funding amount is greater for employees who are older at entry into the plan since the time to fund the benefit is less in the case of an older entrant**. Age/Contribution Level for Defined Benefit Plan Age at Plan Entry Annual Benefit at age 65 Years to Fund Annual Employer Contribution 30 $25,000 35 $1,971 40 $25,000 25 $4,309 50 $25,000 15 $10,847 This set of calculations assumes: * That money deposited before retirement will earn 7% investment return. * No mortality (i.e., no discount for the possibility that some plan participants may die before retirement). * A unisex annuity purchase rate of $1,400 per $10 monthly at age 65 (i.e., it will take a deposit of $1,400 at age 65 to purchase a lifetime annuity of $10 per month beginning at age 65 for any plan participant, male or female). This **makes the benefit attractive to professionals and closely held business owners. They tend to adopt retirement plans for their businesses when they are relatively older than their regular employees. A large percentage of the total cost for a defined benefit plan in this situation goes to fund these key employees' benefits**.

Answer 107

**A 412(i) plan is a defined benefit plan that is funded with a combination of life insurance and annuity contracts**. * Since these contracts **provide for guaranteed rates of return as well as guaranteed annuity payouts over life, plans funded in this manner do not need to use an actuary**. * **All plan benefits are provided through the annuity and life insurance contracts**. * Although the contracts provide a guaranteed rate of return, through the use of dividends, separate accounts or interest rate crediting, they may provide higher rates of return than the guaranteed value.

Answer 108

The tax implications of defined benefit pension plans are: * **Employer contributions to the plan are deductible when made**. * **Taxation of the employee on employer contributions is deferred**. Contributions and earnings on plan assets are **nontaxable to plan participants until withdrawn**, assuming the plan remains qualified. A plan is qualified if it meets the eligibility, vesting, funding, and other requirements. * Under Code Section 415, there is a maximum limit on the projected annual benefit that the plan can provide. **For a benefit beginning at age 65, the maximum life annuity or joint and survivor benefit is the lesser of:** * **$265,000 in 2023** * **100% of the participant's compensation averaged over his three highest-earning consecutive years**. For example, Foxx retires in 2023 at age 65. His high three-year average compensation was $60,000 (average of three highest consecutive years of service). Hence, his employer's defined benefit plan cannot provide a life or joint and survivor annuity of more than $60,000 per year. Another employee, Sharp, who also retires in 2023 at age 65 with high three-year average compensation of $300,000, is limited to a payment of $265,000 annually. * Distributions from the plan must follow the rules for qualified plan distributions. Certain premature distributions may be subject to penalty taxes. * The plan is **subject to the minimum funding rules of Code Section 412. This requires minimum periodic contributions by the employer, with a penalty if less than the minimum amount is contributed**. If a plan is not fully funded, in subsequent years, the employer must make plan contributions at least quarterly until full funding is achieved. * **A defined benefit plan is subject to mandatory insurance coverage by the PBGC. The PBGC is a government corporation funded through a mandatory premium paid by the employer, or sponsors, of covered plans. The premium consists of a flat-rate premium annually per participant, plus an extra amount calculated on the basis of the plan's unfunded vested benefits, if any**. If the employer wants to terminate the plan, the PBGC must be notified in advance and must approve any distribution of plan assets to participants. * **Certain employers may be eligible for a business tax credit to offset qualified plan startup costs**. * A plan **may permit employees to make voluntary contributions to a deemed IRA established under the plan**. Amounts so contributed reduce the limit for other traditional or Roth IRA contributions. * The plan is subject to all the **ERISA** requirements for qualified plans such as participation, funding and vesting as well as the ERISA reporting and disclosure requirements.

Answer 109

While other qualified plans may serve as alternatives to a defined benefit pension plan, they usually do not provide guaranteed benefits at retirement. A breakdown of the alternatives to the defined benefit pension plan follows: * **Money purchase pension plans** provide retirement benefits, but without employer guarantees of benefit levels, and with adequate benefits only for younger plan entrants. * **Target benefit pension plans** may provide adequate benefits to older entrants, but without an employer guarantee of the benefit level. * **Cash balance pension plans** **provide an employer guarantee of principal and investment earnings on the plan fund, but provide adequate benefits only to younger plan entrants**. * **Profit sharing plans, SEPs, stock bonus plans and ESOPs provide a qualified, tax-deferred retirement savings medium, but the benefit adequacy is tied closely to the financial success of the employer and thus whether or not the employer makes consistent contributions**. * **Section 401(k) plans, savings plans and SIMPLE IRAs** provide a qualified, tax-deferred savings medium in which the amount saved is subject to some control by employees themselves. * **Private retirement saving** outside a qualified plan does not provide the same tax benefits as saving within a qualified plan, except in the case of certain IRAs, but is limited to the amount that can be put away annually.

Answer 110

A cash balance pension plan is a qualified employer pension plan that **provides for annual employer contributions at a specified rate to hypothetical individual accounts that are set up for each plan participant.** * The **employer guarantees not only the contribution level but also a minimum rate of return on each participant's account**. * A cash balance plan **works somewhat like a money purchase pension plan, but money purchase plans do not involve employer guarantees of rate of return**.

Answer 111

**A company with a large, young, middle-income work force that desires a secure retirement income will find the cash balance pension plan appropriate**. This plan is used in the following circumstances: * When the **employees are relatively young and have substantial time to accumulate retirement savings**. * When **employees are concerned with security of retirement income**. * When the **work force is large and the bulk of the employees are middle-income**. For example, banks and similar financial institutions find this type of plan particularly appealing. * When the **employer is able to spread administrative costs over a relatively large group of plan participants**. * When the **employer has an existing defined benefit plan and wishes to convert to a plan that provides a more attractive benefit for younger employees and lower costs for older employees**.

Answer 112

The advantages of the cash balance pension plan are: * As with all qualified plans, the cash balance plan provides a tax-deferred savings medium for employees. * **Lump-sum distributions from a cash balance plan may be eligible for special tax treatment**. * **The employer guarantee removes investment risk from the employee**. * **Plan benefits are guaranteed by the federal PBGC**. * The benefits of the plan are easily communicated to and **appreciated by employees**.

Answer 113

The disadvantages of the cash balance pension plan are: * The retirement benefit **may be inadequate for older plan entrants**. * **Due to the need for actuarial services, the minimum funding requirements and the PBGC guarantee, the plan is more complex administratively than qualified defined contribution plans**. * The **shift of investment risk to the employer increases employer costs**.

Answer 114

**A cash balance plan provides a hypothetical individual account for each participant**. These hypothetical accounts are **credited by the employer at least once a year with two types of credit**: * **The pay credit, and** * **The interest credit**. **The pay credit uses a formula based on compensation**. For example, the plan might require the employer to credit each employee's account annually with a pay credit of 6% of compensation. * The pay credit formula may also be integrated with Social Security. * **With Social Security integration, compensation below a level specified in the plan, the integration level, receives a lesser credit than compensation above the integration level**. * This reflects the fact that the employer pays Social Security taxes to provide retirement benefits through Social Security. * A safe harbor provided for cash balance plans in nondiscrimination regulations under Section 401(a) permits a cash balance plan to satisfy the permitted disparity rules on the basis of the defined contribution rules. **The interest credit is an amount of employer-guaranteed investment earnings that is credited annually to each employee's account**. * The interest credit must follow a formula in the plan and cannot merely be discretionary on the employer's part. For example, the interest credit formula in the plan might provide for each employee's account to be credited annually with a rate of earnings defined as the lesser of: * The increase in the Consumer Price Index over the preceding year, or * The one-year rate for U.S. Treasury securities. **The plan can allow the employer to credit accounts with actual plan earnings, if these are higher**. **In a cash balance plan there are no actual individual accounts, as there are in true defined contribution plans**. * **All amounts are pooled in a single fund**. * Any plan participant has a legal claim on the entire fund to satisfy his or her claim to plan benefits. **The employer's annual cost for the plan is determined on an actuarial basis because of the employer guarantee feature**. * **Investment risk lies with the employer, that is, if actual plan earnings fall below total interest credits for the year, the employer must make up the difference**. * **Employer costs can be controlled primarily by choosing the right kind of formula for the interest credit, one that does not risk uncontrollable and unforeseeable employer obligations.** * However, the interest credit formula should not be excessively conservative. If actual plan earnings year after year are more than interest credits, plan participants may resent the employer's enrichment and the positive employee relations value of the plan may be lost. **Investment discretion by participants, or earmarking, is not available in a cash balance plan, because the plan is not technically an individual account plan under ERISA Section 404(c).** * Loans from the plan can be made available, but most employers will not want a loan provision because of the administrative problems resulting from the plan's status as a defined benefit plan without separate participant accounts. * **Life insurance can be purchased by the plan as an incidental benefit to participants or as a plan investment**.

Answer 115

**Some employers who have a traditional defined benefit plan become dissatisfied with the plan because it does not provide an attractive benefit for younger employees, but imposes substantial costs for employees nearing retirement**. * Termination of the defined benefit plan and substitution of a defined contribution plan would require that most or all existing plan assets would have to be immediately credited to vested participants. * However, **a less costly alternative might be to revise the existing plan's formula into a cash balance formula**. * **Under the revised formula, covered employees would receive the greater of**: * The amount provided under a new cash balance formula, or * The amount of the benefit accrued under the old defined benefit formula up to the date of the adoption of the new formula, that is, the frozen benefit. **In many cases, this change will provide an increase in benefits for younger employees, while requiring no additional contributions for a number of years for older employees**. * This is because under most traditional defined benefit formulas, an older employee's frozen benefit will be higher than the cash balance amount based on his compensation and years of service. * Sometimes further contributions for older employees can be suspended for as long as ten years or more under this approach, if investment results are favorable. * Some employers offer special features or incentives to older employees affected adversely by such a conversion. **If the employer amends a defined benefit plan to adopt a cash balance formula, the plan administrator must provide a prescribed written notice to affected plan participants and beneficiaries**. Failure to provide the notice results in a $100/day penalty. This rule also applies to any change resulting in a reduction in the rate of future benefit accrual and amending of any other plan subject to the Code Section 412 funding standards. **This penalty provision was enacted by EGTRRA 2001 and regulations are not yet available**, which adequately define the requirements of the notice. The provision allows for regulations exempting certain plans with fewer than 100 participants under certain circumstances. **It is possible that this notice requirement may have a chilling effect on future cash balance conversions or similar plan restructurings, but this is difficult to predict**.

Answer 116

**The cash balance pension plan is subject to minimum funding rules and mandatory insurance coverage**. The tax implications of a cash balance plan are: * **Employer contributions to the plan are deductible** when made. * **Code Section 415(b) limits the benefits provided under the plan to the lesser of**: * **$265,000(2023)** annually or * **100% of the participant's high three consecutive years average compensation**. This is the plan benefit limit. This limit may be more or less favorable than the defined contribution limit applicable to a comparable money purchase plan. This limit is subject to indexing for inflation in increments of $5,000. * Taxation of the employee on employer contributions is deferred. **Both contributions and earnings on plan assets are nontaxable to plan participants until withdrawn**, assuming the plan remains qualified. A plan is qualified if it meets the eligibility, vesting, funding, and other requirements. * Distributions from the plan must follow the rules for qualified plan distributions. Certain premature distributions are subject to penalties. * The plan is **subject to the minimum funding rules of Section 412 of the IRC**. Actuaries differ as to the correct approach in applying the minimum funding rules. **This requires minimum contributions, subject to a penalty if less than the minimum amount is contributed in any year**. If the plan is not fully funded, the subsequent year's contributions must be made on at least an estimated quarterly basis. * **A cash balance plan is considered a defined benefit plan and is subject to mandatory insurance coverage by the PBGC**. The PBGC is a government corporation funded through a mandatory premium paid by the employer, or sponsors, of covered plans. **The premium is a flat rate premium annually per participant. However, an additional annual premium may be required, depending on the amount of the plan's unfunded vested benefit. If the plan is terminated by the employer, PBGC termination procedures must be followed**. * A **plan may permit employees to make voluntary contributions to a deemed IRA established under the plan**. Amounts so contributed reduce the limit for other traditional or Roth IRA contributions.

Answer 117

Though other alternatives exist, the **cash balance pension plan is unique in guaranteeing minimum investment return**. The following are the alternatives to the cash balance pension plan: * **Money purchase pension plans** and **profit sharing plans** build up similar qualified retirement accounts for employees, but **without the employer guaranteed minimum investment return**. This is illustrated in the table below. Cash Balance versus Conventional Plans * Cash Balance Plan Contribution Rate - Percentage of salary (with actuarial aspects) Investment Risk Employer Investment Earmarking - Not Available Social Security Integration - Available Adequate benefit for older entrants - No Administrative Cost - Higher * Typical Defined Contribution Plan Contribution Rate - Percentage of Salary Investment Risk - Employee Investment Earmarking - Available Social Security Integration - Available Adequate benefit for older entrants - No Administrative Cost - Lower (unless 401(k) or earmarking) Typical Defined Benefit Plan Contribution Rate - Actuarially determined Investment Risk - Employer Investment Earmarking - Not Available Social Security Integration - Available Adequate benefit for older entrants -Yes Administrative Cost - Higher * **Traditional defined benefit plans provide guaranteed benefits for employees, but are more complex in design and administration as shown in the table**. * Individual retirement saving is always an alternative or supplement to any qualified plan, but there is no tax deferral except in the case of IRAs and the contributions are limited.

Answer 118

* Cash Balance Plan Contribution Rate - Percentage of salary (with actuarial aspects) Investment Risk Employer Investment Earmarking - Not Available Social Security Integration - Available Adequate benefit for older entrants - No Administrative Cost - Higher * Typical Defined Contribution Plan Contribution Rate - Percentage of Salary Investment Risk - Employee Investment Earmarking - Available Social Security Integration - Available Adequate benefit for older entrants - No Administrative Cost - Lower (unless 401(k) or earmarking) * Typical Defined Benefit Plan Contribution Rate - Actuarially determined Investment Risk - Employer Investment Earmarking - Not Available Social Security Integration - Available Adequate benefit for older entrants -Yes Administrative Cost - Higher

Answer 119

* **Defined Benefit Pension Plan** is a t**raditional pension plan under which the employee receives a promised or defined pension payout at retirement**. The payout is **based on a formula that takes into account his or her age at retirement, salary level and years of service**. Some of the formulas used for determining the benefit are **the flat amount, the flat percentage or the unit credit types**. The employer bears the investment risk associated with the plan and the **employee gets the promised amount at retirement**. The **plan provides benefits at adequate levels for all employees regardless of age at plan entry, but is especially advantageous for older highly compensated employees**. * **Cash Balance Pension Plan** is a **qualified defined benefit retirement plan where employees are credited with a percentage of their pay, plus a predetermined rate of interest**. The **employer credits a hypothetical individual account for each participant with these two types of credit, the pay credit and the interest credit**. **Employees don't get to make investment decisions, but neither do they have to bear any investment risk**. It is **appropriate for young employees, because they start to build up significant benefits much earlier**.

Answer 120

The employer has an existing defined benefit plan and wants to convert to a plan that provides a more attractive benefit to younger employees and lower costs for older employees. * The retirement benefit may be inadequate for older plan entrants. A cash balance pension plan is appropriate when employees are relatively young and the work force is large and the bulk of the employees are middle-income. It is indicated when the employer has an existing defined benefit plan and wishes to convert to a plan that provides a more attractive benefit for younger employees and lower costs for older employees.

Answer 121

Defined benefit plans are easy to design, administer and explain to employees. Both employers and employees share in assuming the risk of bad investment results in the plan fund. * Defined benefit plans are complex to design and difficult to explain to employees. Moreover, only the employer assumes the risk of bad investment results in the plan fund. The employer must contribute to the plan fund annually. The contribution amount is based on actuarial assumptions. The employer and the PBGC guarantee certain benefit levels within specified limits.

Answer 122

Cash balance pension plan * The cash balance pension plan is most appropriate if the work force is large and the bulk of the employees are middle income, when compared with the defined benefit pension plan, 401(k) plan or the profit sharing plan.

Answer 123

**Defined Contribution Plan**: A **separate account is established for each participant in a defined contribution plan to which contributions are added based on a specific formula**. The employee bears the investment risk. The plan makes no promises regarding retirement benefits. At retirement, the employee receives the sum of all the input amounts plus the investment earnings. Defined contribution plans may take several forms. * **Money purchase plans** have a **guaranteed contribution by the employer of a set percentage of each employee’s salary annually**. * Under a **profit sharing plan**, the employer contributes a portion of the company’s monies to the employees’ individual plans. Unlike money purchase plans, the **employer is not committed to a regular annual contribution, and the contribution may vary from year to year depending on the company’s performance**. The amount of money contributed to each employee **depends on the employee’s salary level**. * In a **savings plan** **employers typically match a percentage of employees’ contributions**. * A **401(k) plan allows employees a choice between taking income in cash or putting the income in a qualified plan**. They may also choose between traditional pre-tax elective deferrals or after tax Roth 401(k) deferrals. Employers may contribute a full or partially matching amount. * **Target/Age Weighted Plans** use **formulas for employer contributions that are based not only on the participant’s compensation but also on the participant’s age on entering the plan**. The **traditional target pension plan, the age-weighted profit sharing plan and the cross-tested plan are three types of plans that use participants’ ages to determine the funding amount**. **Defined Benefit Plans**: **Use a contribution formula based on actuarial techniques**. The **employer bears the risk and the employee is promised the same amount regardless of the market**. The employer must provide adequate contribution to the funds to achieve the promised result. The money in the defined benefit plan grows tax deferred. In addition: * The **employer is able to spread administrative costs over a relatively large group of plan participants**. * When the employer has an existing defined benefit plan and **wishes to convert to a plan that provides a more attractive benefit for younger employees and lower costs for older employees, and still have employer guarantees, a cash balance plan will work**.

Answer 124

$330,000 (2023) * The current (2023) maximum covered compensation limit in calculating benefits in a qualified plan is $330,000.

Answer 125

An employee with compensation greater than $135,000 (2022) and ranked in the top 20% based on compensation * An employee with compensation greater than $150,000 (2023) and ranked in the top 20% based on compensation is a highly compensated employee definition, not a key employee.

Answer 126

The consumer price index * The consumer price index (CPI) is not typically a variable used in the year-to-year actuarial assumptions in the funding requirements for a defined benefit plan. * Assumed compensation increases are an incorporated variable but not the CPI itself as a separate variable.

Answer 127

10% * **Under the excess method, the maximum excess contribution rate for compensation above the compensation threshold is the lesser of**: * **2x the base contribution rate** or * **the base contribution rate plus 5.7%**. In this example, the lesser of 2x the base contribution rate (2 x 5% = 10%) is the maximum excess contribution.

Answer 128

3-to-5-year graded vesting * Three-to-five-year graded vesting is not permitted for a defined benefit purchase pension plan. * **Three-to-five-year cliff vesting is permitted only in a defined benefit plan**.

Answer 129

Defined Benefit Plan * In a defined-benefit plan, the employee's pension benefit is determined by a formula that takes into account years of service to the employer and, in most cases, wages or salary. * The amount the employee receives is defined for him or her. Most common formulas used to determine the benefit are flat amount, flat percentage and unit credit.

Answer 130

An employee with $120,000 compensation and 2% ownership * When an employer has made the top 20% election, only employees with income more than $150,000 (2023) who are ranked in the top 20% based on compensation are considered HCE. Any employee with more than 5% ownership is automatically considered HCE, regardless of compensation.

Answer 131

Participant account earnings attributed to employer contributions * Participant account earnings attributed to employer contributions or employee contributions are not a component in applying the annual additions limit.

Answer 132

3-to-7-year graded vesting * **A top-heavy defined benefit plan must use accelerated vesting**. * A 3-to-7-year graded vesting schedule, while acceptable for a defined benefit plan that is not top-heavy, is not acceptable if the defined benefit plan is top-heavy.

Answer 133

Profit-Sharing Plan * **All pension plans require annual minimum funding**. * **A profit-sharing plan is not required to have annual minimum funding**.

Answer 134

11.7% * Under the excess method, the maximum excess contribution rate for compensation above the compensation threshold is the lesser of: * 2x the base contribution rate or * the base contribution rate plus 5.7%. In this example, the base rate + 5.7% (6% + 5.7% = 11.7%) is the maximum excess contribution.

Answer 135

50/40 test * Not all qualified plans are required to pass the 50/40 test. * **Only defined benefit plans are required to pass the 50/40 test** and the 50/40 test must be passed in addition to the safe harbor test, the ratio percentage test, or the average benefits test.

Bryant - Course 5. Retirement Planning & Employee Benefits. 2. Qualified Retirement Plans Flashcards

(163 cards)