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Course 5: Retirement Savings and Income Planning > Module 1: Qualified Plan Requirements and Regulatory Plan Considerations > Flashcards

Module 1: Qualified Plan Requirements and Regulatory Plan Considerations Flashcards

1
Q

How does the IRS carry out admin duties of a qualified plan?

A
  • supervising the creation of new retirement plans, and monitoring and auditing the operation of existing plans
  • interpreting federal legislation, especially with regard to the tax consequences of certain pension plan designs; and
  • administering the qualified plan system
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2
Q

What are the ERISA requirements that a qualified plan must meet?

A
  • coverage
  • participation
  • vesting
  • reporting and disclosure
  • fiduciary requirements

** ERISA is the non-tax part of retirement plans

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3
Q

Department of Labor Regulatory Responsibilities

A

They ensure retirement plan compliance with ERSIA’s plan reporting and disclosure rules, and oversees compliance with prohibited transaction rules

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4
Q

Prohibited Transaction Exemptions

A

???

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5
Q

Pension Benefit Guaranty Corporation

A

Created under ERISA and is responsible for insuring vested plan participants against loss of benefits from plan termination

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6
Q

How are the losses from benefits insured under the PBGC

A

They are financed by premiums paid by the sponsors of the defined benefit plans

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7
Q

What doesn’t the PBGC cover?

A

It doesn’t cover traditional defined contribution plans.

- professional service employers with 25 or fewer active participants are exempt from the insurance requirements.

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8
Q

Limit on the PBGC

A

The limit is determined by the age at which the person is retired

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9
Q

How can a PBGC terminate a defined benefit plan?

A
  • minimum funding standards are not met;
  • benefits cannot be paid when due; or
  • the long-run liability of the company to the PBGC is expected to increase unreasonably.
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10
Q

Which federal agency is tasked with supervising the creation of new qualified retirement plans?

A

IRS

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11
Q

What makes a plan qualified?

A

It meets the qualifications for 401(a), immediate subsequent sections of Section 401(a), and ERISA

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12
Q

What are types of qualified plans?

A
  • defined benefit plans
  • Defined Contribution Plans
  • Defined Contribution Profit-sharing plans
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13
Q

What are the types of pretirement plans?

A
  • qualified plans
  • Tax-Advantaged Plans
  • Nonqualified Plans
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14
Q

Tax-Advantaged Plans

A
  • SEP Plan
  • SARSEP Plan
  • TIRA
  • Roth
  • SIMPLE IRA
  • Section 403(b)
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15
Q

Nonqualified Plans

A
  • Section 457 plan

- deferred compensation plans such as top-hat plans, etc.

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16
Q

Difference between pension plans and profit-sharing plans

A

Whether the annual retirement plan contribution is mandatory or flexible (discretionary). If the annual contribution is mandatory, the plan is a pension plan. If the annual contribution is not mandatory, the plan is a profit-sharing plan.

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17
Q

The two major government agencies involved in Qualified Plans:

A

IRS and the DOL

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18
Q

Major benefit of having a qualified plan (for the employer)

A

A major tax advantage of being able to immediately deduct all of the contributions made to the plan.

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19
Q

Difference between a qualified plan and a tax deferred plan?

A

A tax-deferred plan does not meet all of the requirements to be classified as a qualified plan, but it often operates very similarly to a qualified plan

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20
Q

Advantages of a Nonqualified plan

A
  • used to provide benefits to highly-valued employees
  • they do not have to meet the nondiscrimination requirements of qualified plans.
  • benefits and contributions can exceed the IRC Section 415 limits
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21
Q

What are nonqualified plans?

A
  • Benefit arrangements that do not meet the IRC Section 401 requirements for qualified plans. The are pretty much a promise by the employer to pay the employee benefits.
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22
Q

What is the taxability of a nonqualified plan?

A
  • The deductions to income are postponed until the employee actually receives the money, or has constructive receipt of the money
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23
Q

ERISA and IRC Requirements Covered in this course:

A
  • Eligibility
  • Coverage (including the nondiscrimination tests and controlled group rules)
  • Limitations on Contributions and Benefits
  • Vesting Requirements
  • Top-Heavy Plans
  • Integration with Social Security (also known as the permitted disparity rules)
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24
Q

Who is eligible for a qualified plan?

A
  • 21 or older

- 1 year of service with the company

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25
Q

Year of service rules for eligibility purposes

A

12-month period during which the employee has worked at least 1000 hours.

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26
Q

Can you increase the waiting period to enter the plan? What happens if you do?

A

Yes, you can increase it to 2 years of service, however if you do that, the employer-sponsor must immediately vest all employer contributions for employees.

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27
Q

Can a 401k use the two year waiting period?

A

No, once an employee has met eligibility requirements, entrance to the plan is on the next available entrance date and they cannot require an employee to wait more than six months to enter into a plan after becoming eligible.

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28
Q

Who meets the criteria of a Highly Compensated Employee (HCE)

A
  • was a GREATER of 5% owner of the employer at any time during the current year or preceding year (this makes them highly compensated regardless of income)
  • In the preceding year, had compensation greater than $130,000
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29
Q

Who is included in the HCE group when an employer makes an election?

A

Only persons in the top 20% and earning greater than $130,000

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30
Q

5% owner as defined by the IRS

A

An individual who owns more than a 5% interest in the company

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31
Q

1% owner as defined by the IRS

A

An individual who owns more than a 1% interest in the company

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32
Q

The 20% election

A

????

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33
Q

Qualified Plan Coverage Requirements (Percentage Test)

A

The Tax Code requires the employer-sponsor of the qualified plan to cover at least 70% of the eligible non-HCE’s.

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34
Q

Active Participation vs. Covered Employee

A

A covered employee means that an employee is benefiting under the plan, as long as their eligible to make contributions and such. An active participant is just someone who actually makes contributions, or has employer contributions allocated on his behalf.

35
Q

What test(s) must a qualified plan meet if they do not satisfy the percentage test?

A
  • The ratio test; or

- the average benefits test

36
Q

The Ratio Test

A

The percentage of non HCE’s covered by the plan must be at least 70% of the percentage of HCE’s who are covered.

37
Q

The Average Benefits Test

A

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.

38
Q

50/40 Test is for who?

A

For defined benefit pension plans

39
Q

50/40 Test

A

Mandates that all defined benefit pension plans must benefit the lesser of:
- 50 employees or 40% of all eligible employees

40
Q

What is the point of Controlled Group Rules?

A

Designed to prevent discrimination against non-HCE’s.

41
Q

Who is considered the control group for Controlled Group Rules?

A

Employers that have a significant degree of common ownership are treated as a single employer for purposes of meeting the participation and coverage rules.

42
Q

Non-top-heavy “defined benefit” vesting schedules

A
  • Five-year 100% or cliff vesting

- Three-to-seven-year graduated or graded vesting

43
Q

Five-Year 100% or cliff vesting

A

In this schedule, no vesting is required before five years of employee service, with 100% vesting then required at the end of the five years of service

44
Q

Three-to Seven-year graduated or graded vesting schedule

A

Using this schedule, the plan must provide vesting that is at least as fast as those listed below:

Starting at year three 20% and then add 20% for every year until you reach 100%

45
Q

“defined contributions” vesting schedule

A
  • Three year cliff vesting schedule

- two-to-six year graded vesting schedule

46
Q

Start date for vesting purposes

A

The years of service schedule begins with an employee’s hire date, not the employee’s entrance into the plan.

47
Q

Auto 100% vested when:

A

An employee reaches normal retirement age, as defined by the plan document

OR

when a qualified plan is terminated

48
Q

Key Employee definition

A
  • an officer of the employer having annual compensation from the employer of more than 185k
  • a greater than 5% ownership of the employer, or
  • a greater than 1% owner of the employer with an income of greater than 150k
49
Q

What makes a plan “top heavy”?

A

If a DB plan provides more than 60% of its aggregate benefits or account balances to key employees

50
Q

What happens if a plan is top heavy?

A
  • it must provide a three-year cliff or two-to-six-year graded vesting schedule
  • it must provide a minimum defined benefit accrual of 2% times the number of years of service, up to 20% for all non-key employees.
  • employer must make a minimum contribution of at least 3% of annual compensation to each non-key employee’s account (if the key employees is less than 3%, the employer will match the non-key employee to the key employee)
51
Q

Covered Compensation

A

The amount of compensation that may be used to determine contributions for a qualified plan ($290,000 for 2021)

52
Q

What plans does the IRC impose limits on?

A

DB Pension Plans
DC Pension Plans
Profit-sharing plans

53
Q

Annual Additions Limit

A

This is the limit that a defined compensation plan annual contributions is limited to by the employer and participant

54
Q

Limits on Defined Benefits Plan

A

Cannot exceed the lesser of:

  • 100% of participants compensation averaged over the three highest consecutive years of compensation, with covered compensation considered in the average being the limit
  • $230,000 annually
55
Q

Defined contribution plan limits

A

Cannot exceed the lesser of:

  • 100% of the participants annual compensation, or
  • $58,000 annually
56
Q

What is considered an “annual addition”

A
  • employer contributions
  • employee contributions, and
  • forfeitures allocated to the defined contributions plan on behalf of the employee
57
Q

What is a forfeitures

A

nonvested amounts returned to the plan when a participant separates from service with out being 100% vested.

58
Q

What is a contributory plan?

A

The employee makes some contributions

59
Q

What is a non-contributory plan?

A

The employer pays it all

60
Q

What determines the deduction limit for a company?

A

25% of total employee covered compensation for defined contribution plans

For a defined benefits plan, it is limited to an amount determined actuarially in Section 404(a) or the amount to meet minimum funding requirements.

61
Q

Why would you integrate your plans with Social Security?

A

It allows for a certain amount of extra contributions or benefits to go to highly paid employees

62
Q

What does the integration with Social Security do?

A

It accounts for the disproportionate benefit accrual on Social Security and provides for a tiered benefit formula, providing a base benefit for compensation up to an integration level.

63
Q

Methods of Integration in Defined Benefit Plans

A
  • Excess Method

- Offset Method

64
Q

DB Plans - excess method of integration

A

The plan defines a level of compensation (referred to as the integration level) and then provides a higher rate of contributions and benefits for compensation above this leve.

65
Q

DB Plans - offset method of integration

A

a formula approximates the existence of Social Security benefits and reduces the plan formula.

66
Q

What is the maximum permitted disparity between the defined benefit percentage below and above the covered compensation levels

A

three-fourths of 1% times the employees years of service, up to 35 years

67
Q

What method is used for DC plans when integrating with Social Security?

A

Can only use the excess method of integration; the offset method is not permitted

68
Q

DC Plans - excess method of integration

A

The excess method provides a higher contribution above the integration level than below the integration level

69
Q

Maximum permitted disparity for a DC Plan

A

The lesser of:

  • two times the base percentage, or
  • the base percentage plus 5.7%
70
Q

Plans that are permitted from the disparity rules

A

ESOP, SARSEP, SIMPLE

71
Q

Can employee elective deferrals and employer matching contributions be integrated with social security?

A

No

72
Q

Calculation for Excess Contribution Percentage

A

base contribution percentage + permitted disparity = excess contribution percentage

73
Q

When must the qualified plan and the trust used be established so that it takes place?

A

It must be established and adopted in the employers tax year for which the plan will take effect.

74
Q

Advanced Determination Letter

A

Sent to the IRS to ask for a favorable ruling on if the qualified plan meets the technical requirements from the IRS so they know before they put it into place and there are a bunch of penalties.

75
Q

Alternative to an Advanced Determination Letter

A

They can adopt either a master or prototype plan.

76
Q

List of Reports and Disclosure requirements from ERISA

A
  • Summary Plan Description
  • Annual Reports (Form 5500 series)
  • Summary Annual Report
  • Individual Accrued Benefit Statement
  • Summary of Material Modification

Certain reports must also be filled with the PBGC`

77
Q

When must a Summary Plan Description be provided?

A

Automatically to all plan participants within 120 days after the plan is established or 90 days after a new participant enters an existing plan

78
Q

Who is the Annual Report Filed with?

A

The IRS and the DOL

79
Q

Summary Annual Report

A

This is actually provided to the plan participants each year, within nine months of the end of the plan year. This summarizes the basic information on the Form 5500

80
Q

Individual Accrued Benefit Statement

A

Must be provided to a plan participant within 30 days of request. Defined contribution plans must provide benefit statements at least quarterly to participants who direct their own investments and annually to those who cannot.

81
Q

As defined by the PPA, an eligible investment advice arrangement exists where either:

A
  • there are neutral fees (they do not vary on depending on investments chosen)
  • an unbiased computer model certified by an independent expert to create a recommended portfolio for the client’s consideration is used
82
Q

Who is considered a party in interest of a qualified plan?

A
  • Fiduciary
  • employer whose employees are covered by the plan
  • an investment adviser providing advice to plan participants
83
Q

Prohibited Transactions

A
  • the sale, exchange of property, or lease of any property between the plan and a party in interest
  • loans between the plan and any party in interest
  • transfer of any assets or use of plan assets for the benefit of a party in interest;
  • the plans acquisition of employer securities or real property in excess of legal limits; and
  • self-dealing, which is when a fiduciary acts in his own best interest in a transaction rather than in the best interest of his clients.

Course 5: Retirement Savings and Income Planning (7 decks)

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