Chapter 3 - Qualified Plans

Question 1

Profit Sharing
Stock Bonus
ESOPs
401(k)
Thrift
New Comparability
Age-Based Profit Sharing

Answer 1

Profit Sharing Plans (Defined Contribution)

Question 2

Defined Benefit (DB)
Cash Balance (DB)
Money Purchase (DC)
Target Benefit (DC)

Answer 2

Pension Plans (Defined Benefit or Defined Contribution)

Question 3

1. There must be a plan document.
2. There are eligibility requirements.
3. There are coverage requirements.
4. There are vesting requirements.
5. There are special qualification requirements that apply to:
   a. Top-Heavy Plans.
   b. Cash or Deferred Arrangements (CODAs) (401k, 403b).
6. There are limitations on Benefits and Contributions.

Answer 3

Qualification Requirements

Question 4

The terms of the plan are detailed in the plan document

Plan document must be consistent with IRC qualification requirements to be a qualified plan

The document must be in writing and signed by the end of the plan year for which it is to be effective.

Answer 4

Plan Document

Question 5

Employees are eligible who are age 21 and have one year of service (1,000 hours worked during one plan year).

There is a special election to require two years of service, but the consequence of such an election is immediate - 100% vesting requirement.

Not available for 401(k) plans
Tax-exempt educational institutions can require employees to wait until age 26.

Answer 5

Eligibility

Question 6

The plan must have at least 2 plan entrance dates per year because you cannot make an eligible participant wait longer than 6 months to enter.

Answer 6

Plan Entrance Date

Question 7

NHCC = Non Highly Compensated covered
NHCT = Non Highly Compensated Total
HCC = Highly Compensated covered
HCT = Highly Compensated Total

Required to Pass
1. Safe Harbor Test = >70% of NHC covered. or
(NHCC/NHCT) >70%

2. Ratio % Test =
   (% of NHCC/% of HCC) >70%
3. Average Benefits Test =
   (AB % of NHCC/AB % of HCC covered) >70%

Answer 7

All qualified plans must pass at least ONE of the following average tests

Question 8

Plans must cover the lesser of:
50 non-excludable Employees
40% of non-excludable employees

Answer 8

All Defined Benefit Plans must meet one of the coverage tests and additionally pass the 50/40 Test

Question 9

Owner Employees:
Either an owner of 5%>*
Compensation in excess of $155,000 for 2024**

Non-Owner Employees:
Compensation in excess of $155,000 for 2024**

*Anyone who owns more than 5% of a company’s stock or capital this year or last year.
** if elected, add “and in top 20% of employees ranked by salary”

Answer 9

Highly Compensated Employees (HC)

Question 10

Those shares owned by:
Yourself
Spouse
Children
Grandchildren
Parents

Sum these, this is your ownership %

Answer 10

Attribution

Question 11

A Top-Heavy Plan is one where more than 60% of account balances/accrued benefits are attributable to key employees.

DB:
A DB plan is top heavy if the present value of the total accrued benefits of key employees in the defined benefit plan exceeds 60% of the present value of the total accrued benefits of the defined benefit plan for all employees.

DC:
A DC plan is top heavy when the aggregate of the account balances of key employees in the plan exceeds 60% of the aggregate of the accounts of all employees.

Answer 11

Top Heavy Plans (too much of plan benefits go to key employees)

Question 12

1. Greater than 5% owner or
2. Greater than 1% owner with compensation in excess of $150,000 (not indexed) or
3. An officer with compensation in excess of $220,000 (2024), but based on last year’s compensation.
   a. An Officer is determined based on all the facts

Answer 12

Key-Employee

Question 13

If DC is top-heavy, there are minimum funding and vesting requirements:

1. Funding - Employer must provide non-key employees with a contribution equal to at least 3% of employees compensation.
   a. Except if key employee’s contributions are less than 3%.

If DB is top-heavy, there are minimum funding and vesting requirements:

1. Funding - Employer must provide non-key employees with a benefit equal to 2% per years of service (limit 20%) times employees average annual compensation.
2. Vesting - Must use 2-6 graduated, or 3 year cliff.

Answer 13

If plans are top-heavy

Question 14

Special Plan Requirements:

Cash or Deferred Arrangements (CODA)

Actual Employee Deferral Percentage (ADP)

Actual Employer Contribution Percentage (ACP)

Answer 14

Cash or Deferred Arrangements

Question 15

$345,000 for 2024

This is the maximum amount of compensation that can be considered when determining contribution amounts to a DC Plan.

Answer 15

Covered Compensation Limit

Question 16

For Defined Benefit Plans:
The Lesser of:
1. $275,000 for 2024 (or)
2. 100% of the average of the employee’s three highest consecutive years of salary
This is the maximum benefit that can be received during retirement.

For Defined Contribution Plans:
Maximum contribution for the year:
Lesser of:
1. 100% of an employee’s compensation (or)
2. $69,000 for 2024

The “Annual Additions Limit” (the maximum amount that can be contributed to a DC plan in the current year) include the summation of:
1. Employer Contributions, and
2. Employee Contributions, and
3. Any forfeitures allocated to the participant’s account

Answer 16

Covered Compensation for each plan

Question 17

If employer contributions to a DC plan are less than 6% of compensation of participants in those plans:

Then the combined limit does not apply to any employer contributions to defined contribution plans. In such a case, the combined limit of the greater (the greater of 25% of compensation, or the contributions to the defined benefit plan or plans, to the extent such contributions do not exceed the amount necessary to satisfy the minimum funding standard for the defined benefit plans) applies only to contributions to defined benefit plans.

If employer contributions to a defined contribution plan exceed 6% of compensation of its participants in those plans:

Then the amount of employer contributions to defined contribution plans to which the combined limit applies is equal to the amount of employer contributions for the plan year, less 6% of compensation of participants in those plans.

Answer 17

Multiple Plan Limitation