Chapter 3 - Qualified Plan Overview Flashcards
Define Anti-Alienation Protection
An ERISA-afforded protection for qualified plans that prohibits any action that may cause a qualified plan’s assets to be assigned, garnished, levied, or subjected to bankruptcy proceedings. Exceptions to the anti-alienation rule apply for tax levies and QDROs.
Define Average Benefits Percentage Test
One part of the average benefits coverage test that requires the average benefit percentage of the nonhigly compensated employees to be at least 70 percent of the average benefit percentage of the highly compensated employees
Define Average Benefits Test
A qualified plan coverage test that determines whether the plan adequately benefits the nonhighly compensated employees by comparing the benefits received by the nonhighly compensated to the benefits of the highly compensated employees and also determines whether the employee classification is nondiscriminatory. The test consists of the Average Benefits Percentage Test and the Nondiscriminatory Classification Test.
Define Cliff Vesting Schedule
A vesting schedule that provides the participant’s full rights to the plan’s asset immediately upon the passage of a certain number of years.
Define Covered Compensation Limit
The maximum employee compensation that may be considered for contributions to qualified plans or the accrual of benefits to a qualified plan. For 2014, the covered compensation limit is $260,000
Define Covered Employee
An employee who benefits from the qualified plan during the year.
Define Defined Benefit Plan
A qualified retirement plan that provides its participants with pre-determined calculated benefits at retirement.
-Any plan that is not a defined contribution plan.
Define Defined Contribution Plan
A qualified retirement plan that provides its participants with either a contributory or noncontributory retirement account, which benefits from tax-deferred growth for contributions and earnings in the plan.
Define Employee Plans Compliance Resolution System (EPCRS)
The system provided by the IRS that allows plan sponsors to voluntarily correct any disqualifying actions within two years of the plan year end in which the problem occurred.
Define Employee Retirement Income Security Act (ERISA)
Legislation enacted by Congress in 1974 as a result of various abuses of plan sponsors to provide protection for an employee’s retirement assets, both from creditors and from plan sponsors.
Define 50/40 Coverage Test
A coverage test applicable only to a defined benefit pension plans that requires the plan to cover every day during the the plan year the lesser of 50 employees of 40% of all eligible employees.
Define Forfeitures
The percentage or amount of a participant’s accrued benefit that was not vested to the employee at the employee’s termination from the plan sponsor. The forfeited amount stays in the plan and may be allocated to other plan participants (defined contribution plan) or reduce future plan costs (defined contribution or defined benefit plan).
Define Graduated Vesting Schedule
A vesting schedule that provides an employee with full rights to a certain percentage (less than 100%) of benefits after completing a number of years of service and provides the employees with an additional percentage for each additional years of service.
Define Highly Compensated Employee
An employee who is either a more than 5% owner at any time during the plan year or preceding plan year, or had compensation in excess of $115,000 for the prior plan year (2014). A special election can be made to count only those employees whose compensation is in excess of $115,000 and are in the top 20% of employees as ranked by compensation.
Define Key Employee
Any employee who is a:
- greater than 5% owner,
- a greater of 1% owner with compensation in excess of $150,000 (not indexed), or
- an officer with compensation in excess of $170,000 (2014) as determined last year.
Define Lump-Sum Distribution
A complete distribution of a participant’s account balance within one taxable year on account of death, disability, attainment of age 59 1/2, or separation from service. Lump-sum distributions from qualified plans are eligible for special taxation options.
Define Nonexcludable
An employee who must be considered as eligible to participate in a qualified plan.
Define Officer
An administrative executive who is in regular and continued service and has the executive authority normally associated with an officer.
Define Payroll Taxes
The combination of OASDI and Medicare tax paid by an employee and employer on an employees compensation.
Define Pension Plan
A qualified retirement plan that pays a benefit, usually determined by a formula, to a plan participant for participant’s entire life during retirement.
Define Plan Entrance Date
.The date an eligible employee becomes a participant in a qualified plan.
Define Profit Sharing Plan
A qualified retirement plan established and maintained by an employer where the employer makes deductible contributions on behalf of the employees, the assets grow tax-deferred, and if there is a CODA feature, the employee also makes pretax contributions.
Define Qualified Domestic Relations Order
A court order related to divorce, property settlement, or child support that can divide a participant’s interest in a qualified plan.
Define Qualified Plan
A retirement plan that meets the qualifications of IRC §401(a).
Define Ratio Percentage Test
The coverage test that compares the ratio of nonhighly compensated covered by a retirement plan to the ratio of highly compensated covered by the plan. The comparative ratio must be at least 70%
Define Safe Harbor Coverage Test
A coverage test that requires the employer to cover at least 70% of the nonexcludable, nonhighly compensated employees.
Define Standard Eligibility Requirements
IRC eligibility rules for participation in a qualified plan. Provides that an employee must be considered eligible to participate in the plan after completing a period of service with the employer extending beyond the later of the date on which the employee attains the age of 21 or the date on which the employee completes one year of service.
Define Top-Heavy
Rules that were designed to ensure that plans established primarily to benefit the owners and executives of the company also provided some minimum benefit level of benefits for the rank-and-file employees. A plan is top heavy if more than 60% of either the account balance or the accrued benefits are for the benefit of key employees.
Define Two-Year Eligibility Election
A special election that overrides the standard eligibility requirements and permits the employers to only consider those employees who have two years of service as eligible to participate in a plan. If the employer elects the two year requirement, than the employer must also provide 100% vesting at the completion of two years of service. This exception is not available for 401(k) plans.
Define Vest
To give an employee rights to employer contributions and earnings in their retirement plan benefits.
Define Year of Service
At least 1,000 hours of service for an employer and 12 months of continuous employment
What are the two types of qualified plans?
Pensions Plans
Profit Sharing Plans
