Lesson 3 of Retirement Planning: Administration of Qualified Plans Flashcards

Question

Exam TIP

Answer 1

HINT! While you should be aware of the l0-year averaging and pre-74 gains methods, your time IS better spent on the NUA calculations.

Answer 2

Taxpavers who receive a lump-sum distribution of employer securities (such as stock) may benefit using a special tax treatment on the distribution. This tax treatment allows the more favorable capital gain tax treatment instead of ordinary income tax treatment on the NUA portion of the distribution as well as a deferral of recognition of the gain on the NUA portion until the distributed employer securities are sold. Net Unrealized Appreciation (NUA) is defined as the excess of the fair market value of the employer securities at the date of the lump-sum distribution over the cost of the employer securities at the date the securities were contributed to the qualified plan. FMV at Date of Distribution (minus) Value of Securities Used at the Date of the Employer Contribution = Net Unrealized Appreciation At the date of the subsequent sale of the employer secunties, the participant will be required to recognize the long-term capital gain deferred since the date of the distribution. Any subsequent gain after the distribution date will be treated as either short-term capital gain or long-term capital gain based on the holding period beginning at the date of the distribution

Answer 3

First, the participant must qualify for lump-sum distribution treatment. Second, the NUA portion must be relatively high in comparison to the cost basis portion; otherwise, the recipient may be paying too much immediate ordinary income tax for the benefit of future long-term capital gain treatment. The next issue concerns whether the stock is to be held by the recipient. If so then the investment risks of holding a large concentration of a single security must be considered. Finally cash flow considerations must be evaluated to determine the impact of holding the securities versus selling the securities. Note: The amount subject to ordinary income tax is subject to a penalty if there is no exception in the IRC.

Answer 4

The inherited stock will **receive an adjustment of basis to FMV at date of death less any unrecognized NUA.** - The tax will be paid when the assets are disposed of by the heirs.

Answer 5

Answer: D When inheriting stock with NUA treatment, the beneficiary assumes the FMV minus the unused NUA. This is different than typical inherited property or inherited IRAs. The NUA portion will retain long-term capital gain rates. Any gain above the date of death value will be taxed based on the beneficiaries holding period. Virginia will pay long-term capital gain rates on $150,000 and $25,000 will be taxed at short-term capital gains rate if she sells immediately.

Answer 6

An exception to the ERISA anti-alienation rules has been made if the assignment or alienation is at the direction of a Qualified Domestic Relations Order (QDRO). A QDRO is an order, judgment, or decree pursuant to a state domestic relations law that creates or recognizes the right: - of a third party alternate payee (nonparticipant) to receive benefits from a qualified plan. There are two basic approaches that may be used to divide the benefit depending on the reason the QDRO is being used. - One approach, often called the "shared payment approach," splits the actual benefit payments made between the participant and the alternate payee. - The second approach, often called the "separate interest" approach, divides the participant's retirement benefit into two separate portions. A distribution pursuant to a QDRO will not be considered a taxable distribution to the third party alternate payee as long as the assets are deposited into the recipient's IRA or qualified plan.

Answer 7

To discourage taxpayers from using the funds before retirement tayable distributions before the age of 59½ will generally be subject to a 10% early withdrawal penalty. Earl Withdrawal Penalty - A distribution prior to the participant attaining the age of 59½ may be subjected to a 10% early withdrawal penalty unless the distribution meets one of several exceptions

Answer 8

## Footnote "Attainment of Age 55 and seperation from service" make sure to understand. Exam Questio covers it, a few flashcards away.

Answer 9

If the distribution is part of a series of substantially equal periodic payments, also called Section 72(t) distributions, made at least: - annally for the life - or life expectancy of the participant - or the joint lives - or joint life expectancies of the participant and his designated beneficiary, the payments will not be subjected to the 10% early withdrawal penalty. The payments must begin after the participant has separated from service, and to be considered substantially equal periodic payments the payments must be made in any one of the following three ways: - **Required Minimum Distribution Method:** The payments are calculated in the same manner as required under minimum distribution rules (discussed below). Note that payments are recalculated annually. - **Fixed Amortization Method:** The payment is calculated over the participant's life expectancy if single, or the joint life expectancy if married, and the interest rate is reasonable. This method creates a series of installment payments that remain the same subsequent years - **Fixed Annuitization Method:** The participant takes distributions of the account over their life expectancy determined by dividing the account balance by an annuity factor using a reasonable interest rate and mortality table. - Under this method, the payment does not change in future years.

Answer 10

The payment calculated under one of the methods determined above must continue exaclty as calculated for the later of five years from the date of the first payment or the participant attaining the age of 59½. - If the payments change in any way, the participant will be considered to have made a distribution equal to the full account balance of the qualified plan in the first year of the substantially equal periodic pavments

Answer 11

First, the government provides an exception (E) to the 10% early withdrawal penalty if the distributions are dividends paid within 90 days of the plan year end from an ESOP. Second, if the distribution is made to pay certain unpaid income taxes (T) because of a tax levy on the plan. Third there is no 10% penalty if the distribution is made to the participant for certain medical expenses (M) paid during the year greater than 7.5 percent of the participant's adjusted gross income (whether the person itemizes or not). Fourth. if the distribution is pursuant to a QDRO, (Q) there will be no 10% penalty on the distribution. Fifth, if your primary residence is located in a federally declared disaster area and suffered damages. The mandatory 20% withholding from qualified plans will not apply. Sixth, if you have a medically declared terminal illness (employee must furnish sufficient evidence to the plan administrator), that will result in death with in 84 months. Other exceptions to the 10 percent early withdrawal penalty are: - plan rollovers and - plan loans | Help: E, T, M, Q

Answer 12

For Oualified Plans to avoid the 10% penalty, they make a "MESS AT D^3Q" (Medical expenses, Equal periodic payments. Separaton from service, Age, Tax levels (and terminal illness), Death, Disability, Disaster and QDRO)

Answer 13

For IRAs to avoid the 10% penalty, they say "HIDE ME" (first time Home purchase, health Insurance, Death and disability, Higher education, Medical expenses, Equal periodic payments, and of course, age,)

Answer 14

Answer: A The distribution described in option A will be subjected to the 10% penalty. Education expenses are only an exception to the 10% penalty for IRAs, not qualified plans. All of the other options are exceptions to the 10% early withdrawal penalty. Option B describes the exception for separation from service after age 55. Option C describes the exception for the rollover of qualitied plan assets. Option D describes the exception for substantially equal periodic payments.

Answer 15

Answer: D Situation 1 is subjected to the 10% early withdrawal penalty because Debra has not separated from service. Situation 2 will not be subjected to the 10% early withdrawal penalty because Frank is older than 59½. Situation 3 will be subjected to the 10% penalty because Marie does not quality for any of the exclusions from the 10% penalty

Answer 16

The minimum distribution rules require individuals to begin taking minimum distributions when the participant attains the age of 72 for tax payers that reached age 70½ **after** 12/31/2019 and **before** 1/1/2023. Individuals attaining age 72 **after** 12/31/22 and **before** 1/1/33, will start minimum distributions at age 73. SECURE 2.0 Act of 2022 made adjustments to the minimum distribution age for 2023 and for the year 2033 (age 75 for those reaching age 74 after 12/31/32. Additional guidance should be released). If the funds are not distributed by the required date, a 25 percent excise tax will be levied on the participant for failure to take the Required Minimum Distribution (RMD). SECURE 2.0 Act of 2022 decreased the penalty amount. - The 25% excise tax can be further reduced to 10% if the taxpayer takes the distribution from the same plan to which the tax relates, during the "correction window." Correction window end on the earlier of - 1) the date the IRS issues a notice of deficiency, - 2) the dale the IRS assesses the excise tax or, - 3) the last day of the second taxable year that begins after the end of the year in which the tax is imposed. The penalty is on an amount equal to the RMD less any distribution that was taken, but the result cannot be less than zero.

Answer 17

You must Know the Minimum Distribution Rules

Answer 18

Minimum distributions apply to assets in a: qualified plan, - IRA, - 403(b), - SEP, - SIMPLE, or - 457 plan. While minimum distribution rules do not apply to: - Roth IRAs, - they do apply to Roth accounts in a 401(k), - 403(b) plan, - or governmental 457(b) plan, - and to inherited Roth IRAs.

Answer 19

**The first distribution must be taken by April 1** of the year following the year the participant attains the age of 72 for those that reach 70½ after 12/31/2019. Age 73 if the taxpayer attains age 72 after 12/31/22. For each year thereafter, however, the RMD must be taken before December 31 of the tax year. If the participant delays taking the first MD until April 1 of the year following the attainment of age 72 (or 73), the second MD must still be taken by December 31 of that same year. The delay results in a bunching of two MDs in the same year. **NOTE:** There will be no first year calculated distributions in the year 2023. Those that would have reached RMD age this year, will now need to take their first MD for 2024. Expect to see a taxpayer that is age 72 before 1/1/2023, and is delaying their first year distribution to April 1, 2023 in test questions, or a taxpayer needing to take their normal distribution.

Answer 20

EXCEPTION - There is an exception to the general RMD for qualified plans if a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 72 (or 73 after 12/31/22). A participant that is still employed by the plan sponsor of the qualified plan does not have to begin taking RMD until April 1 of the year after the participant terminates employment with the plan sponsor. - The exception is NOT available for any participant that owns more than 5% of the ownership of the plan sponsor in the year he reaches the age of 72 (or 73 after 12/31/22).

Answer 21

The required minimum distribution (RMD) is determined each year by dividing the account balance as of the close of business on December 31 of the year preceding the distribution year by the distribution period determined according to participant's age as of December 31 of the distribution year in the Uniform Lifetime Table. If a question is asked about this on the CP® exam, the table below will be provided.

Answer 22

When calculating the RMD for the plan participant, always use the Uniform Lifetime Table, which accounts for the age of the account holder and one other person who is 10 years younger. One exception to this rule occurs when the participant's sole designated beneficiary is the participant's spouse and that spouse is more than 10 years younger than the participant. -In that case, use the **Joint Life Expectancy Table** to calculate the RMD. - Utilizing the Joint Life Expectancy Tables will result in a longer life expectancy and decrease the RMD

Answer 23

Assume Ryan's account balance at December 31, 2022 was $400,000, and he is 75 by December 31, 2023. He, therefore, uses a distribution period from the uniform lifetime table of 24.6 and will need to take a distribution for 2023 of $16,260.16 by December 31, 2023 ($400,000) ÷ (24.6) = $16,260.16

Answer 24

Answer: B Mario must take a required minimum distribution before April 1, 2024, which is the year following his attainment of the required minimum distribution age. Note - this example has purposely left off a specific age due to the change from age 72 to 73 for RMDs in 2023.

Answer 25

Answer: B $450,000 ÷ 27.4 = $16,423: 36. His distribution for 2022 must be taken by April 1, 2023. His 2022 distribution is based on year end 2021 balance and the factor for his age on December 31, 2022. His 2023 distribution will be based on the December 31, 2022 balance and his age factor for 73, and must be distributed by December 31, 2023. Delaying his first distribution causes two distribution to be completed in one vear.

Answer 26

As discussed, upon reaching age 72 (or age 73 after 12/31/2022), taxpayers are required to begin taking minimum distributions. It is important to understand, however, that a minimum distribution must be taken from each qualified plan in which the taxpayer has an account balance. Therefore, if the taxpayer had three qualified plans resulting from previous jobs, then three minimum distributions would have to be taken. Many taxpayers have multiple IRAs; however, taxpayers are permitted to combine the value of all of their IRAs in determining the required minimum distribution. The RMD for the IRAs can then be taken from any account or from multiple accounts.

Answer 27

HINT!! Value age as of the END of the year for which you are **taking the distribution** (You can accurately project it!). Value your portfolio as of the **end of the previous year.** Remember it's the year for which you are making the distribution - whether you take it then or not!

Answer 28

Minimum distribution calculation for 2022: $300,000 ÷ 27.4 = $10.948.91 Minimum distribution calculation for 2023 $360,000 ÷ 36.5 = $13,584.91 Full Minimum distribution for 2023 if Jerry elected to delay his 2022 distribution to the last possible moment: $24,533.82 = (10,948.91 + 13,584.91)

Answer 29

SECURE Act 2019 changed the rules around distributions from qualified plans (and IRAs) after the taxpayer's death. All distributions following the taxpayer's death will follow the same rules, regardless if RMDs have begun or not. The rules are based on the type of beneficiary you are.

Answer 30

1. Eligible Designated Beneficiary 2. Designated Beneficiary 3. Non-Designated Beneficiary If no beneficiary has been named by December 31 of the year following the owner's death (or the beneficiary is the decedent's estate or a charity), then distributions must continue over the remaining distribution period of the deceased owner. The remaining distribution period is reduced by one each year.

Answer 31

An Eligible Designated Beneficiary can distribute the assets over their life expectancy. An eligible beneficiary is one of the following: *Surviving Spouse* - Surviving spouse can still rollover assets to their own IRA. If the deceased participant was under age 72 before 1/1/2023 or 73 after 12/31/22, surviving spouse can delay distribution until the deceased participant would have been 72 before 1/1/2023 or 73 after 12/31/22. *Child participant who has not reached age of majority.* - Once the child reaches age of majority they become an ineligible beneficiary and must follow the rules for a Designated Beneficiary (distribute within 10 years - once reaching the age of majority). Disabled or chronically ill individual Any other individual who is NOT more than ten years younger than the participant. Upon the death of the Eligible Designated Beneficiary, their beneficiary must distribute the assets within 10 years.

Answer 32

Is a listed beneficiary that does not meet the criteria of an Eligible Designated Beneficiary. A Designated Beneficiary must distribute the account balance by December 31st of the year containing the 10th anniversary of the participant death. - A grandchild, minor or not, will be a designated beneficiary.

Answer 33

This category includes an estate, charity and some trusts. - Continues to follow the pre-SECURE Act rules (see chart below).

Answer 34

## Footnote EXAM TIP: Know this Chart

Answer 35

Answer: C Because Dita had already begun required minimum distributions, the five-year requirement does not apply, but her estate must continue taking distributions over Dit's remaining life expectancy reduced by one each year. All of the other options are true statements

Answer 36

Qualified Plan Selection Establishing a Qualified Plan Administration Amending and Terminating a Qualified Plan

Answer 37

Business Objectives Employee Census Cash Flow Considerations Administration Costs Owner's Business and Personal Objectives Plan Selection Application

Answer 38

An important first step to consider when selecting a qualified plan is to prepare an employee census. The census will identify each employee, their age, compensation, number of years of employment, and any ownership interest. The census helps to identity which employees will benefit (and to what extent) from using various possible types of plans. In addition to a current census, a review of employee turnover is essential to plan selection because such a review can help determine the appropriate vesting schedules and how to deal with fortetures resulting from employee termination

Answer 39

The decision maker should always consider the company's financial stability and the predictability of its cash flows prior to plan selection.

Answer 40

When a company implements a qualified plan, there are numerous costs associated with adopting and administering the plan.

Answer 41

If the company is a small or closely held company, then the owner's personal and business objectives are critical in plan selection. Small business owners typically want to reduce their current taxes and save for their own financial future.

Answer 42

After evaluating each of the above issues, a financial advisor/pension expert can assist the owner or key decision maker in determining which plan suits the owner and the company's needs.

Answer 43

Answer: A A profit sharing plan would be the best choice for Jay's company. All of the other options described pension plans that require mandatory funding. A pension plan would not be an appro- priate choice due to the company's unstable cash flows.

Answer 44

Answer: B Cash balance and money purchase pension plans favor younger entrants. Defined benefit and target benefit pension plans favor older age entrants with less time to accumulate, and therefore, require higher funding levels

Answer 45

The employer-sponsor is responsible for setting up and maintaining the qualified plan. * Adopting a Qualified Plan * Notifying Eligible Employees * Qualified Trusts * Investing Plan Assets

Answer 46

A qualified plan must be detailed in a written plan that is adopted by the company. To take an income tax deduction for contributions for a particular tax year, the plan must be adopted by the due date of the tax return plus extensions (for plan years after 12/31/19). **Master or Prototype Plans:** - The majority of qualified plans follow standard forms called master or prototype plans. These plans have been approved by the IRS and are available for employers to simply adopt. **Individually Designed Plans** - If the company has specific needs that are not addressed in a master or prototype plan, or if they so choose, the company can have their own individually drafted plan. - In order to be considered a qualified plan, however, the plan must be permanent and for the exclusive benefit of the employees and their beneficiaries. **- Determination Letters:** -Determination letters may be used when a retirement plan is adopted, amended, or terminated. -They may be filed in advance of the plan being adopted or immediately thereafter, usually by filing Form 5300.

Answer 47

Answer: D Determination letters are issued by the IRS at the request of the plan sponsor. The plan sponsor Is not required to request a determination letter. Even if the determination letter is requested and approved, the IRS **may still disqualify the plan**.

Answer 48

Information regarding the qualified plan must be distributed to employees who might be eligible for the plan and for those ineligible employees, too. Before the IRS can issue a determination letter on the qualified status of a retirement plan, the employer must provide the IRS with satisfactory evidence that it has notified the persons who qualify as interested parties. Proper advance notice can be made in person, via e-mail or mail, or by posting a notice in a location generally used for posting notices to employees. The employer is required to provide, free of charge, a summary of the details of the qualified retirement plan, called a Summary Plan Description, to employees, participants, and beneficiaries under pay Status (receiving benefits). The employer is also required to provide the plan participants notices of any plan amendments or changes. This can be done either through a revised Summary Plan Description or in a separate document, called a Summary of Material Modifications. In addition to the Summary Plan Description, the employer must automatically provide the participants free of charge, a copy of the plan's Summary Annual Report each year.

Answer 49

The assets of the qualified plan must be placed in a qualified trust or a custodial account. Custodial accounts are generally maintained by a bank or other financial institutions.

Answer 50

Plan assets will either be managed by the plan sponsor (or an asset management firm hired by the plan sponsor or individually by the plan participants. Defined contribution plan participants bear the investment risk for the assets in their accounts. Despite this, plan sponsors may choose to manage the plan assets or hire an outside asset management firm to manage the assets for the plan participants. However, most often, **defined contribution plan assets are managed by the plan participants** (known as self directed). Plan sponsors are generally considered fiduciaries of qualified plans. Being classified as a fiduciary requires a certain level of responsibility and prudence. The plan must therefore provide the participants with at least three alternatives in which to invest within the retirement plan. These alternatives must meet all of the following criteria: - Be diversified; - Have materially different risk and return characteristics; and - Each alternative, when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio.

Answer 51

Qualified retirement plans require ongoing administration and maintenance. Operating the Plan: (Subheaders) - Covering Eligible Employees - Making Appropriate Contributions - Taking Deductions

Answer 52

Qualified plans require annual coverage testing to ensure that the rank-and-file employees (nonhighly compensated and non-key) are sufficiently covered.

Answer 53

Minimum Funding Requirement Contributions in General

Answer 54

In general, sponsors of money purchase pension plans, cash balance pension plans, defined benefit pension plans, and target benefit pension plans must contribute enough money into the plan to satisfy the minimum funding requirements as determined by an actuary for each year.

Answer 55

A qualified plan is generally funded by employer contributions (often called a noncontributory plan because employees do not contribute to the plan), but employees participating in the plan may also be permitted to make contributions (a contributory plan). A company can make deducible contribuions for a tax year up (plus extensions) for the year of contributions. A promissory note made out to the plan for contributions is a prohibited transaction and is **not a payment that qualifies for an income tax deduction**. While the employer generally applies contributions in the year in which they are paid the employer may apply the payment to the previous year if all the following requirements are met:

Answer 56

Self-employed individuals can make contributions on behalf of themselves only if they have positive net earnings (compensation) from self employment in the trade or business for which the plan was established. Catch-up contributions for those participants age 50 and over are not subject to the annual defined contribution limit and thus can be in addition to these limits. In the event that more money is contributed to a defined contribution plan than is allowed under the limits above, the excess amount is called the excess annual addition. A plan can correct excess annual additions if the excess was caused by a reasonable error in estimating a participant's compensation, determining the elective deferrals permitted, or because of forfeitures allocated to participants' accounts. A plan can correct excess annual additions by using one of the following methods: Participants may be permitted to make nondeductible contributions to a plan in addition to the employer's contributions. Even though these employee contributions are not deductible, the earnings will accrue tax free until distributed in later years. These contributions must satisfy certain nondiscrimination tests.

Answer 57

The employer can usually deduct, subject to certain limitations, contributions made to a qualified plan, including those made for their own retirement. The deduction for contributions to a defined contribution plan cannot exceed 25% of the compensation paid or accrued during the year to eligible employees participating in the plan. The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must calculate the appropriate amount of mandatory funding. In the case of an employer who maintains both a defined benefit plan and a defined contribution plan, the funding limit set forth is combined. The maximum deductible amount is **the greater of 25% of the aggregate covered compensation of employees, or the required minimum funding standard of the defined benefit plan** (as previously discussed). This limit does not apply if the contributions to the defined contribution plan consist entirely of employee elective deferrals. In other words, **employee elective deferrals do not count** against the plan limit.

Answer 58

While self-employed individuals may adopt basically any qualified plan (generally not a stock bonus plan or an ESOP since there is no stock involved with sole proprietorships, partnerships, or LLCs), the plan they choose to adopt will be referred to as a **Keogh plan.** A Keogh plan is simply a qualified plan for a self-employed person. An important distinction of Keogh plans is the reduced contribution that can be made on behalf of the self-employed individual. There is a special computation needed to calculate the maximum contribution and tax deduction for a Keogh plan on behalf of self-employed individuals. Since self-employed individuals do not have W-2s, the IRC uses the term "earned income" to denote the amount of compensation that is earned and can be considered by the self-employed individual. Earned income is defined as net earnings from self-employment less one-half of self-employment tax less the deduction for contributions to the qualified plan on behalf of the self-employed person.

Answer 59

## Footnote C0ntribution Rate = 0.25

Answer 60

Answer: C The calculation is $87,500 x 0.9235 x0.153 = $12,363. The full 15.3% can be used to save a step due to the income being under the social security wage base.

Answer 61

In this instance Isaiah can contribute $37,641 to the plan for himself.

Answer 62

When solving the Keogh contribution calculation, it is important to understand that while 25% is the limit for employee compensation, the self-employed individual maximum is 25% of the self-employed individual's earned income. The 25% of earned income effectively translates to 20% of net self-employed income less one-half of self-employment tax. The reason is because the self-employed individual is responsible for the employer's share of self-employment taxes, and the self-employed individual's ultimate compensation is relative to the retirement contribution made on his behalf.

Answer 63

Know that for the maximum Keogh Plan contribution, the 25% really equals 20%! If a self-employed individual contributes 15% to their employees, 15% is used in the contribution rate formula, making the employer contribution 13%.

Answer 64

If the employer contributes more to the qualified plan than the permitted deduction for the year, the excess contribution can be carried over and deducted in future years, combined with, or in lieu of, contributions for those years. The amount that can be carried over and deducted may be subject to an excise tax. In general, a 10% excise tax applies to nondeductible excess contributions made to qualified pension and profit sharing plans. The 10% excise tax does not apply to any contribution made for a self-employed individual to meet the minimum funding requirements in a defined benefit plan. Even if that contribution is more than the earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax.

Answer 65

Generally, forfeitures occur when employees terminate employment.

Answer 66

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. In the past, ERISA fiduciary standards and prohibited transaction rules often discouraged employers from furnishing investment advice and information to plan participants. The Pension Protection Act of 2006 created a new exception to the prohibited transactions rule permitting plan fiduciaries to be compensated for giving participants investment advice through an eligible investment advice arrangement subject to rules intended to limit the possibility of abuse. The initial penalty on a prohibited transaction **is a 15% excise tax** on the amount involved for each year (or part of year) in the taxable period (defined below). Under the PPA 2006, no excise tax will be assessed if the transaction is **corrected within 14 days** of the date the disqualified person (or other person knowingly participating in the transaction) discovers, or reasonably should have discovered, the transaction was a prohibited transaction. If the transaction is not corrected within the taxable period, an additional tax of 100 percent of the amount involved is imposed.

Answer 67

Prohibited transactions generally include actions by a disqualified person that potentially could have adverse consequences to the plan or participants, including:

Answer 68

ERISA Periodic Pension Benefit Statements Department of Labor Pension Benefit Guaranty Corporation

Answer 69

The Employee Retirement Income Security Act of 1974 (ERISA) places several burdens on retirement plan administration. One of the key obligations ERISA imposes is that of **fiduciary responsibility.**

Answer 70

As a result of the Pension Protection Act of 2006, the administrator of a defined contribution plan is required (beginning in 2007) to provide a benefit statement: - (1) to a participant or beneficiary who has the right to direct the investment of assets in his or her account, at least quarterly, - (2) to any other participant or other beneficiary who has his or her own account under the plan, at least annually, and - (3) to other beneficiaries, upon written request, but limited to one request during any 12-month period. For both a defined contribution plan and a defined benetit plan, a benefit statement must be written in a manner calculated to be understood by the average plan participant.

Answer 71

The Department of Labor is charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers' benefit rights as regulated by ERISA.

Answer 72

The PBGC, just as its name implies, acts to guarantee pension benefits. The PBGC does not cover defined contribution plans, nor does it cover **defined benefit pension** plans of professional services corporations with 25 or fewer participants. The PBGC does cover all other defined benefit plans at a cost to the plan sponsor of $96 (2023) per plan participant per year and $48 (2023) per $1,000 of plan underfunding for the year.

Answer 73

Makes Sense? Reason to Amend/Terminate Plan Amending a Qualified Plan Terminating a Qualified Plan Plan Freeze

Answer 74

Just as creating a qualified plan often makes good business sense, terminating or changing a qualified plan may also make good business sense. - Employers may (and should) reserve the right to change or terminate the plan and to discontinue contributions within the plan document. - Terminations often occur when a law change occurs that makes one type of plan less advantageous than it was previously, the company can no longer financially maintain the plan, or the company realizes the plan no longer meets the needs of the employees or the company.

Answer 75

Qualified plans, especially for small employers, are often changed to maximize the provision of benefits to key employees. Some plans allow forfeitures to be reallocated to other plan participants or may be used to reduce plan costs. Small business owners frequently change this election based on the benefits they are able to receive from the plan. Another reason a plan may be changed or terminated is that a law change may make an entire plan or plan provision obsolete. A qualified plan may also be terminated when the employer finds that it can no longer financially support the plan it has in place. Sometimes the decision is made by the employer, while other times the decision is made by the PBGC. A plan may also be terminated simply because the employer finds that the plan is not meeting the needs of the employees or the company.

Answer 76

Plan changes are very common due to tax law changes, business changes, or to solve a defect in the plan. Changes are often easily implemented by amending the plan document. When the plan document is amended, the administrator must also revise the Summary Plan Description.

Answer 77

When a qualified plan is terminated, and presuming that sufticient funds are available, all of the **participants in the plan become fully vested in their benefits** as of the date of termination. Permancy Requirement Defined-Benefit Plan Terminations - Standard Termination - Distress Termination - Involuntary Termination Defined Contribution Plan Terminations

Answer 78

Although qualitied plans are required to be permanent, permanency does not necessanly require that the plan never terminate or continue in existence forever. Permanency in this context just means that the **plan must not be established as a temporary program.**. The goal behind the "permanency requirement is to dissuade owners from creating plans that will only benefit the owners and key employees and then having the plan vanish betore benetts can be accrued by rank-and-file employees. The abandonment of the plan for any reason other than business necessity within the first few years after it is established will be evidence the plan was **not a bona tide program for the exclusive benefit of employees.**

Answer 79

Because the PBGC is responsible for underfunded defined benefit plans, there are **more requirements for terminating a defined benefit plan** than for a defined contribution plan. Title IV of ERISA requires that a defined benefit plan terminate under a - standard, - distress, or - involuntary termination.

Answer 80

A standard termination is voluntary and may occur when the emplover has sufficient assets to pay all benetits (liabilities) at the time of final distribution.

Answer 81

A distress termination is voluntary and occurs when the employer is in financial difficulty and is unable to continue with the plan financially.

Answer 82

An involuntary termination may be initiated by the PBGC for a plan that is unable to pass benefits from the plan in order to limit the amount of exposure to the PBGC.

Answer 83

Compared to defined benefit plans, terminating a defined contribution plan is relatively easy. Defined contribution plans are already funded and not subject to PBGC. Essentially, all the employer must do to terminate the plan is pass a **corporate resolution** to do so. At that point, any final promised contributions must be completed and the assets must be distributed from the plan.

Answer 84

Answer: B Retirement plans must not be created as a tax shelter for the owner. If they have been, plan ter- mination can result in retroactive disqualitication. All other statements are acceptable reasons to terminate a qualitied retirement plan

Answer 85

In some cases an emplover may find that it no longer wants to contribute to a plan but does not want to full terminate the plan. This can be accomplished by freezing the plan. - For **defined contribution plans**, a freeze simply means that the employer will no longer make any controutions. - For a **defined benefit plan**, participants will no longer accrue additional benefits but the plan sponsor must maintain the previously accrued benefits.

Lesson 3 of Retirement Planning: Administration of Qualified Plans Flashcards

(122 cards)