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Retirement > Chapter 5 - Profit Sharing Plans > Flashcards

Chapter 5 - Profit Sharing Plans Flashcards

1
Q

Define Actual Contribution Percentage Test (ACP)

A

A nondiscrimination test that limits the sum of employee after-tax contribution and employer matching contribution for the HC based on the sum of the employee after-tax contributions and employer matching contributions for the NHC.

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2
Q

Define Actual Deferral Percentage Test (ADP)

A

A nondiscrimination test that limits employee elective deferrals for the highly compensated employees (HC) based on the elective deferrals of non-highly compensated employees (NHC)

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3
Q

Define Age-Based Profit Sharing Plan

A

A qualified profit sharing plan plan that uses a combination of age and compensation as the basis for allocating the contribution to a participant’s account.

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4
Q

Define Cash or Deferred Arrangement (CODA)

A

Permits an employee to defer a portfolio of his salary on a pretax basis to a qualified plan or receive the salary as current taxable income.

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5
Q

Define Catch-Up Contribution

A

A contribution that allows those nearing retirement to increase their deferral contributions to improve their financial situation for retirement. An elective contribution for employees 50 an over that allows them to increase their elective deferral limit by up to $5,500 for 2014.

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6
Q

Define Corrective Distribution

A

A distribution to satisfy the ADP or ACP test that reduce the elective deferrals or contributions of the HC employees by distributing or returning funds to the HC employees.

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7
Q

Define Covered Compensation Limit

A

The maximum employee compensation that may be considered for contribution to qualified plan or the accrual of benefits to a qualified plan. For 2014 the limit is $260,000.

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8
Q

Define DB(k) Retirement Plan

A

For plan years beginning in 2010 and later, a DB(k) retirement plan incorporates, under one single plan with a single trust, a defined benefit plan combined with a 401(k) arrangement.

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9
Q

Define Employee Elective Deferral Contributions

A

Pretax employee contributions to a qualified plan with a CODA. The employee must choose to defer the compensation before earning the compensation.

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10
Q

Define Employer Matching Contributions

A

Employer provided contributions to a qualified retirement plan with a CODA. The employee must choose to defer the compensation before earning the compensation.

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11
Q

Define Forfeitures

A

The % 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 participants or reduce future plan costs.

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12
Q

Define Hardship Distributions

A

A distribution from a 401(k) plan because the employee has an immediate and heavy financial need and the withdrawal is necessary to satisfy the need. The distribution is taxable and subject to penalties to the extent the participant has other resources to have satisfied the financial need.

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13
Q

Define Individual 401(k) Plan

A

An easy-to-administer, low-cost retirement plan designed for self-employed individuals and owner-only businesses.

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14
Q

Define Non Comparability Plan

A

A qualified profit sharing plan in which contributions are made to employees’ accounts based on their respective classification in the company as defined by the plan sponsor.

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15
Q

Define Nondiscriminatory

A

A requirement of all qualified plan. The eligibility rules, coverage requirements, and contribution allocations of a qualified plan cannot discriminate against the rank-and-file employees for the benefit of the shareholder, officers, and highly compensated employees.

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16
Q

Define One Year of Service

A

1,000 hours or service with an employer within a 12 month period.

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17
Q

Define Permitted Disparity (Social Security Integration)

A

A technique or method of allocating qualified plan contributions to an employee account that provides a higher contribution to those employees whose compensation is in excess of the SS wage page or selected integration level for the plan year.

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18
Q

Define Profit Sharing Plan

A

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.

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19
Q

Define Qualified Automatic Contribution Arrangement (QACA)

A

A plan that contains a “qualified automatic enrollment feature” and is eligible for a new nondiscrimination safe harbor under PPA 2006.

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20
Q

Define Qualified Matching Contribution (QMC)

A

Additional matching contributions made by the employer to satisfy the ADP or ACP that increases the ACP or ADP of the NGC employees by who had deferred compensation during the plan year.

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21
Q

Define Qualified Nonelective Contribution (QNEC)

A

A contribution made by the employer to satisfy the ADP or ACP test that increases the ADP or ACP of the NHC employees by making additional contributions to all NHC eligible employees without regard to any elective deferral election made by the employees.

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22
Q

Define Recharacterization of Deferrals

A

To change the nature of any excess employee deferrals from pretax employee contributions to after-tax employee contributions.

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23
Q

Define Safe Harbor 401(k) Plans

A

A 401(k) plan that satisfied a minimum contribution or matching test and allows the plan sponsor to bypass the ADP test, the ACP test, and the top-heavy tests.

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24
Q

Define Standard Eligibility

A

The general eligibility requirement that requires an employer to consider an employee eligible when the employee attains 21 year of age and has completed on-year of service.

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25
Q

Define Thrift Plan

A

A qualified retirement plan that permits employees to make after-tax contributions to the plan. Although the contributions are taxable before being contributed to the plan, the account still benefits from tax-deferred growth on earnings.

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26
Q

Define Thrift Savings Plan (TSP)

A

A retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve.

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27
Q

What type of profit sharing plans provide for larger allocations of contributions to go to shareholders, officers, and HC employees?

A
  • Aged-based profit sharing plan
  • Integrated plans
  • New comparability plans.
28
Q

How late can contributions be made to a profit sharing plan?

A

Contributions to a plan for a plan year can be made as late as the due date of the company income tax return (including extensions).

29
Q

What can an employer do relating to deductions if they contributed more than 25% of covered compensation to the employee’s DC plan?

A

They can carry it forward the contribution amount in excess of the 25% limit and deduct this amount in a future year. However, the amount carried forward when added to the contribution made for the future year cannot exceed 25 percent. Additionally, the employer is required to pay 10% excise tax on the portion of the contribution that exceeds 25% of the covered compensation for the current year.

30
Q

What it the excess rate (regarding permitted disparity) limited to in DC plans?

A

The excess rate is limited to the lesser of twice the base rate or a maximum difference of 5.7%.

31
Q

For a new comparability plan to be non-discriminatory, it has to conform to one of the two “minimum allocation gateways”. What are those?

A

1st Gateway - Each NHCE has an allocation of at least 1/3 of the allocation rate of the HCE with the highest allocation rate.
2nd Gateway - Each NHCE has an allocation of at least 5% of the NHCEE’s compensation.

32
Q

What plans allow for a cash or deferred arrangement (CODA)?

A

PSPs & Stock bonus plans.

33
Q

What are three advantages of 401({k) plans to employees?

A
  • Shelter current income from taxation in a qualified plan
  • Self-directed investments
  • Earnings grow tax-deferred until distributed.
34
Q

What are three advantages of 401({k) plans to employers?

A
  • Minimal expense
  • No annual contribution commitment required
  • Owner employees may participate.
35
Q

What types of entities may establish a 401(k) plan?

A

Employers, such as corporations, partnerships, LLCs, and proprietorships may establish such plans. Also tax-exempt entities are permitted to establish them.
Also, self-employed individuals and owner-only businesses with no employees may establish individual 401(k) plans.

36
Q

What is the most popular form of election under CODA?

A

A salary reduction agreement - the employee agrees to reduce compensation in exchange for the elective deferral contribution into the plan.

37
Q

What can a salary reduction agreement apply to?

A
  • Current salary
  • A salary increase
  • bonuses
  • commissions, or
  • other forms of compensation for services.
38
Q

Designated Roth contributions are elective contributions under a qualified cash or deferred arrangement that are what?

A
  1. Designated irrevocably by the employee at the time of the cash or deferral election as designated Roth contributions that are being made in lieu of all or a portion of the pre-tax elective deferral contributions the employer is otherwise eligible to make under the plan,
  2. Treated by the employer as includible in the employee’s gross income at the time the employee would have received the contribution amount in cash if the employee had not made the cash or deferral election, and
  3. maintained by the plan in a separate account.
39
Q

What is the difference between a Roth IRA and a Roth Account regarding participation?

A

Roth IRA - Anyone can participate as long if they have earned income under the limit.
Roth Account - Anyone who is a participant in a 401k, 403b, or 457 plan that permits Roth contributions.

40
Q

What is the difference between a Roth IRA and a Roth Account regarding contribution limits?

A

Roth IRA - IRA Annual limit (2014) $5,500 plus $1,000 catch up if age 50 and older. Subject to AGI limit.
Roth Account - Deferral limit (2014) -$17,500 plus $5,500 if age 50 or older. No AGI limits.

41
Q

What is the difference between a Roth IRA and a Roth Account regarding if rollover recharacterizations are permitted?

A

Roth IRA - Yes, they are permitted.

Roth Account - No, not permitted. Once the rollover takes place, it cannot be undone.

42
Q

What is the difference between a Roth IRA and a Roth Account regarding minimum distributions?

A

Roth IRA - Only at the death of the participant

Roth Account - Yes, required.

43
Q

What is the difference between a Roth IRA and a Roth Account regarding requirements for qualified distributions.

A

Roth IRA - 5 years & on account of death, disability, age 59 1/2 or first time home purchase (up to $10,000)
Roth Account- 5 years & account of death, disability, or age 59 1/2.

44
Q

What is the difference between a Roth IRA and a Roth Account regarding tax for nonqualified distributions (early distribution penalties may apply to part of the distribution)

A

Roth IRA - Nonqualified distributions are distributed in order: contributions (basis), conversions (basis), then earnings (taxable).
Roth Account - Nonqualified distributions are prorated between Roth contributions (basis) and earnings (taxable).

45
Q

Because a CODA is attached to a PSP or stock bonus plan, what are the non matching contributions from the employer called?

A

nonelective employer contributions.

46
Q

Besides the usual nondiscrimination tests, what are the other two special tests a plan that maintains a CODA must also pass?

A
  • The actual deferral percentage test (ADP) and

- The actual contribution percentage test (ACP)

47
Q

What three options do employers have with respect to 401(k) nondiscrimination testing?

A
  1. perform the ADP and ACP tests and take corrective action of the plan fails the test,
  2. institute a qualified automatic enrollment feature and comply with the new safe harbor, or
  3. comply with the old safe harbor.
48
Q

If the ADP schedule if the ADP for NHC employees is:

a. 0 - 2%
b. 2 - 8%
c. 8% and over

A

a. 2 times ADP for NHCs
b. 2% plus ADPs for NHCs
c. 1.25x ADP for NHCs.

49
Q

In the first plan year, what do you use for the ADP for the NHC employees?

A

Either 3% of the actual ADP for the current year.

50
Q

If a plan fails the ADP test, what four possibly remedies are available to bring the plan into compliance?

A
  • Corrective Distributions
  • Recharacterization
  • Qualified Nonelective Contributions (QNEC), or
  • Qualified Matching Contributions.
51
Q

What are two reasons that may cause a plan to not meet the ADP test?

A
  • The highly compensated employees deferred too much, or

- The non-highly compensated employees deferred too little

52
Q

The ACP test calculates a contribution percentage based on the sum of what?

A
  1. Employee after-tax contributions, and

2. Employee matching contributions

53
Q

What must happen for a Safe Harbor 401(k) to pass the ADP and ACP tests?

A

The plan must provide a minimum contribution that must be immediately 100% vested. The permissible contributions can either be a 3% minimum nonelective contribution or a matching contribution that matches at least 100% of the first 3% and 50% of the next 2% deferred by the employee.

54
Q

What is a benefit of plans that contain a qualified automatic enrollment feature?

A

They are eligible for a new nondiscrimination safe harbor and are treated as meeting the ADP test and the ACP test, and are not subject to the top-heavy rules.

55
Q

A qualified automatic enrollment feature must meet certain requirements with respect to what?

A
  1. Automatic deferral
  2. Matching or nonelective contributions, and
  3. notice to employees.
56
Q

What is the elective deferral schedule on a QACA?

A

Year 1 - At least 3%
Year 2 - At least 4%
Year 3 - At least 5%
Year 4 and thereafter - At least 6%

57
Q

What does an employer have to do for an automatic enrollment feature to satisfy the contribution requirement?

A

Either:

  • Meets the matching contribution requirements, or
  • Makes a nonelective contribution to a defined contribution plan of at least 3% of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the automatic enrollment feature.
58
Q

Regarding the matching contribution requirement for QACA’s, how does a plan generally satisfy the matching contribution requirement?

A

If under the arrangement:

  1. The employer makes a matching contribution on behalf of each nonhighly compensated employee that is equal to 100% of the employee’s elective deferrals up to 1% of compensation and 50% of the employee’s elective deferrals between one and six percent of compensation, and
  2. The rate of match with respect to any elective deferrals for highly compensated employees is not greater than the rate of match for nonhighly compensated employees.
59
Q

To satisfy the notice requirement for a QACA, what must the notice to eligible employee’s explain?

A
  1. The employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf or to elect to have contributions made in a different amount, and
  2. How contributions made under the automatic enrollment arrangement will be invested in the absence of any investment election by the employee.
60
Q

What are the restrictions on plan loans that employers have to put in place if they are to be allowed? 6

A
  • Must be made available to all participants and beneficiaries on an effectively equal basis
  • Must be limited in amount
  • Must be paid back within a certain time period,
  • Must bear a reasonable rate of interest,
  • Must be adequately secured, and
  • The administrator must maintain proper accounting for the loans.
61
Q

In a CODA type plan, what can distributions occur?

A
  • retirement, death, or separation of service of the participant,
  • the termination of the plan without establishment of another plan,
  • certain acquisitions of the company or company assets
  • the attainment of age 59.5 by the participant, or
  • certain hardships.
62
Q

What must distributions on account of hardships be limited to?

A

The maximum distributable amount.

63
Q

What is the maximum distributable amount (re: hardships)? What does it not include?

A

= the employee’s total elective deferral contributions as of the date of distribution - the amount of previous distributions of elective contributions.

It does not include:

  • Earnings,
  • Qualified Nonelective Contributions, or
  • Qualified Matching Contributions.
64
Q

A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for any of what?

A
  • Expenses for medical care described in IRC §213(d) previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care described in IRC §213(d)
  • Costs directly related to the purchase of a principal residence for the employee (excludes mortgage payments),
  • payment of tuition, related educational fees, and room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children, or dependents, or
  • payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
65
Q

What are the three sources of contributions to a Thrift Savings Plan?

A
  1. Employee contributions,
  2. Agency automatic contributions, and
  3. Matching contributions

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