Module 1 Key Terms Flashcards
(44 cards)
Internal Revenue Service (IRS)
Carries out administrative duties of the qualified retirement plan system.
Involves:
-Supervise the creation of retirement plans and operation of existing plans
-Interpreting federal legislation, tax consequences of pension plan
-Administrating the qualified plan system
Employee Retirement Income Security Act
(ERISA)
Governs non-tax aspects of private retirement plans and employee benefits.
Qualified plans include:
Coverage, Participation, Vesting, Reporting/disclosure, Fiduciary Requirements
Requires plan sponsors to report to:
IRS, DOL, PBGC
ERISA Sections (Titles)
Title I- Protects employees’ right to collect benefits and imposes nondiscrimination and funding requirements.
Title II- establishes plan qualification requirements for special treatment under the Internal Revenue Code.
Title III establishes plan qualification requirements for special treatment under the Internal Revenue Code.
Title IV-establishes plan qualification requirements for special treatment under the Internal Revenue Code.
Department of Labor (DOL)
Involved in retirement plans through the Office of Pension and Welfare Benefit Plans. Oversees compliance with the prohibited transaction rules. Issues Prohibited Transaction Exemptions (PTE). Regulates plan fiduiaries. ONLY COVERS DEFINED BENEFIT PLANS.
Pension Benefit Guarantee Corporation (PBGC)
Created under ERISA. Insures vested plan participants against loss of benefits from plan termination.
Benefit payments are financed by premiums paid by sponsors of defined benefit plans
Termination Rules:
1- Minimum funding is not met
2-Benefits cannot be paid when due
3-Long-run liability of PBGC is expected to increase reasonably
The SECURE Act
Portability of lifetime income options for defined contribution plans, 403(b) plans, and governmental 457(b) plans.
Qualified Plans
Meet requirements for IRC Section 401(a), Section 401(a), and ERISA. Regulations come from IRA and DOL. If meet requirements, they get immediate deductibility on all contributions made to the plan. Employer is not subject to payroll tax.
Elements of a Qualified Plan
(a)-The plan document provides the terms and benefit amounts provided by the plan.
(b)-Once adopted, the plan is recognized as a separate legal entity (must be in writing)
(c)-The trust holds the plan assets. The trustee is usually selected by the employer.
(d)-The funds, once contributed, become the plan funds and, except in unusual circumstances, cannot be returned to the employer
Non Qualified Plan
Flexible but don’t benefit from tax advantages or tax-advantaged plans
Don’t have to meet nondiscrimination requirements, can exceed IRC section 415 limits
Plan Eligibility
12 months with 1,000 hrs worked
(21 and 1 Rule)
When the employer begins to make plan contributions on behalf of the participant. Must immediately vest all employer contributions to for employees
Highly Compensated Employee (HCE)
1- Has greater than 5% owner (individual or family business) during the current or preceding year
2- In the preceding year had compensation greater than $135,000 (2022) and compensation exceeding $150,000 (2023)
Non Highly Compensated Employee
(Non-HCE)
Don’t fit in HCE Criteria
5% Owner
an individual who owns more than a 5% interest in the company
1% Owner
Individual who owns more than 1% of the company
Percentage Test
Section 410(b) of the Tax Code requires the employer-sponsor of the qualified plan to cover at least 70% of the eligible non-HCEs.
Active Participation
For purposes of determining the deductibility of IRA contributions differs from being covered under a qualified plan.
Ratio Test
the percentage of nonhighly compensated employees (non-HCEs) covered by the plan must be at least 70% of the percentage of highly compensated employees (HCEs) who are covered.
ratio test =
% of non-HCEs covered / % of HCEs covered
(≥70%)
Average Benefits Percentage Test
the average benefits percentage accrued for non-HCEs as a group must be greater than or equal to 70% of the average benefits percentage accrued for the HCEs.
average benefits % non-HHCEs/ average benefits % HCEs
(≥70%)
50/40 Test
All defined-benefit pension plans must be the lesser of 50 employees and 40% of eligible employees
Controlled Group Rules
Prevent discrimination from Non- HCE. Employers that have a significant degree of common ownership are treated as a single employer
Includes:
Businesses that are related as either brother-sister or parent-subsidiary corporations (as defined in the Tax Code)
Vesting
Occurs when an employee’s nonforfeitable right to receive a present or future retirement plan benefit is accrued over time, per the schedule identified in the employer-sponsored retirement plan document.
Exceptions of service:
1- Years before implementation of the plan
2- Years before 18
Non-Top-Heavy
Defined benefit pension plan must vest at least as rapidly as one of the following two schedules:
FIve year 100% or cliff vesting:In this schedule, no vesting is required before five years of employee service, with 100% vesting then required at the end of five years of service.
Three-seven year graduated or graded vesting: Figure 1.3
Top Heavy
A defined benefit plan that provides more than 60% of its aggregate benefits or
account balances to key employees
1- Must provide accelerated three year cliff or two to six year graded vesting
2- It must provide a minimum defined benefit accrual of 2% times the number of years of service (up to ten years) for all nonkey employees.
Includable Compensation
Tax code imposes a limitation on plan benefits and contributions. Cap is $330,000
