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CFP Retirement & Income Planning > Qualifed Plans > Flashcards

Qualifed Plans Flashcards

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1
Q

Defined Benefit Plans: Pension Plans

A

Defined Benefit Pension Plans

Cash Balance Pension Plans

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2
Q

Defined Contribution Plans: Pension Plans

A

Money Purchase Pensions

Target Benefit Pensions

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3
Q

Are ALL Profit Sharing Plans Defined Benefit or Defined Contribution plans?

A

ALL Profit sharing plans are Defined Contribution Plans

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4
Q

Profit Sharing Plans

A

Profit Sharing Plans

Stock Bonus Plans

ESOPs

401k Plans

Thrift Plans

New Comparability Plans

Age-Based Profit sharing plans

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5
Q

Pension Plan Characteristic:

A

Legal Promise of the plan

Paying a pension at retirement

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6
Q

Pension Plan Characteristic: In-Service Withdrawals?

A

YES, if age 59 1/2 or older

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7
Q

Pension Plan Characteristic: Mandatory Funding?

A

YES

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8
Q

Pension Plan Characteristic: Investment in Employer Securities?

A

Up to 10% of employer securities

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9
Q

Pension Plan Characteristic: QJSA & QPSA? (Qualified Joint Survivor Annuity & Qualified Pre-retirement Survivor Annuity)

A

YES

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10
Q

Profit Sharing Plan Characteristic: Legal Promise of Plan?

A

Deferral of Compensation

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11
Q

Profit Sharing Plan Characteristic: In-Service Withdrawals?

A

YES (after TWO years)

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12
Q

Profit Sharing Plan Characteristic: Mandatory Funding?

A

NO; up to employee to fund it

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13
Q

Profit Sharing Plan Characteristic: Investment in Employer Securities?

A

Up to 100% can be invested in employer securities

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14
Q

Profit Sharing Plan Characteristic: QJSA & QPSA?

A

NO

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15
Q

Defined Benefit Characteristics: Annual Contribution Limit?

A

Not less than the unfunded current liability for years 2006 - 2007

Starting in 2008, DB plans are subject to new annual contribution limits under PPA 2006

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16
Q

Defined Benefit Characteristics: Who assumes investment risk?

A

Employer

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17
Q

Defined Benefit Characteristics: How are Forfeitures allocated?

A

Reduce Plan Costs

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18
Q

Defined Contribution Characteristics: What’s the annual contribution limit?

A

25% of covered compensation

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19
Q

Defined Contribution Characteristics: Who assumes investment risk?

A

Employee

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20
Q

Defined Contribution Characteristics: How are Forfeitures allocated?

A

Reduce plan costs

Or

Allocate to other participants

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21
Q

Defined Contribution Characteristics: Is it subject to Pension Benefit Guaranty Corporation Coverage (PBGC)?

A

No

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22
Q

Defined Contribution Characteristics: Does it have separate investment accounts?

A

YES, they’re usually separate. participants have account balances

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23
Q

Defined Contribution Characteristics: Can credit be given for prior service?

24
Q

Defined Benefit Characteristics: Is it subject to PBGC coverage?

Study These Flashcards
A

Yes
(except professional firms with less than 25 employees)

25
Defined Benefit Characteristics: Does it have separate investment accounts?
NO, They’re commingled. Participants have accrued benefits
26
Defined Benefit Characteristics: Can credit be given for prior service?
Yes
27
Advantages of Qualified Plans
Payroll taxes avoided on ER Contributions (not for EE elective deferrals though) Tax deferral of earnings & Income ERISA Protection - Anti Alienation: prohibits any action that may cause plan assets to be assigned, garnished, levied, or subject to bankruptcy proceedings. - Protection from Employers
28
Qualified Plans Advantages: Special Tax Options for Lump Sum distributions?
Net Unrealized Appreciation (NUA)
29
Qualified Plans Qualification Requirements: Plan Document
Must be in writing by end of tax year Funding doesn’t have to occur until tax return filing plus extension
30
Qualified Plans Qualification Requirements: Eligibility
21 years old & 1 year of service (1,000 hours worked during one plan year) Or 2 years of service w/ 100% vesting (doesn’t apply to 401k plans) Tax-Exempt educational institutions can require age 26 Plan entrance date: Must have at least 2 per year
31
Qualified Plans DC Plan: Vesting
Noncontributory: 2 to 6 years graduated Or 3 year cliff Deferral (contributory) - 100% Vested
32
Qualified Plans Qualification Requirements: Special Qualification Requirements apply to?
Top-Heavy Plans Cash or Deferred Arrangements (CODAs) (2 to 6 years graduated or 3 year cliff)
33
Qualified Plans Qualification Requirements: Eligibility for Long Term PT Employees
For plan years beginning after December 31, 2020 401k must allow Long-Term PT EE’s to participate in 401k (SECURE ACT) upon completion of: - 500 hours per year - 3 continuous years - Years completed after 2020 will count - Eligibility would begin in 2024 (after completion of 3 continuous years)
34
Qualified Plans Qualification Requirements: Coverage Tests can EXCLUDE?
Ineligible EE’s (don’t meet the 21 & 1 Rule) EE’s covered under collective bargaining agreement (Union) Nonresident alien EE’s that do NOT do services in US Part-time EE’s not meeting eligibility under SECURE ACT
35
Qualified Plans Coverage Tests: Nondiscriminatory or not?
Must be Nondiscriminatory
36
Qualified Plans Coverage Tests: Safe Harbor Test
Greater than or equal to 70% of NHC Covered
37
Qualified Plans Coverage Tests: Ratio % Test
(% of NHC Covered / % of HC covered) Result must be greater than or equal to 70%
38
Qualified Plans Coverage Tests: Average Benefits Test
AB% of NHC / AB% of HC AND Nondiscriminatory Test must be greater than or equal to 70%
39
Highly Compensated EE Defined as?
Either: Any owner of >5% this year or last year Or Comp in excess of $150k for prior year - unless employer elects to consider top 20% of EEs as ranked by salary
40
DB Plans must additionally pass what coverage test?
50/40 Test
41
DB Plans: 50/40 Test Defined
Plan must cover lesser of: - 50 employees - 40% of employees
42
Company has 100 eligible EE’s & sponsors a DB Pension Plan. What’s the minimum number of EE’s that must be covered by the plan to conform with ERISA?
50/40 Rule Lesser of 50 or 40% of EE’s = 40
43
Qualified Plan DB: Vesting
3-7 year graduated Or 5 year cliff ER can always be more generous
44
Top-Heavy Plan
DC: > 60% of account balance attributable to key EE’s DB: >60% of accrued benefits attributable to key EE’s
45
Key Employee Definition
>5% owner Or >1% owner w/ comp excess of $150,000 Or Officer w/ comp excess $215,000
46
Top Heavy Plan: How it affects Funding and vesting for DC Plans?
DC: EE gets contribution made on their behalf equal to at least 3% of EE’s comp - except if key EE’s contribution is less than 3%
47
Top Heavy Plan: How it affects Funding and vesting for DB Plans?
Non-Key EE gets benefit equal to 2% per years of service (limit 20%) times EE’s average annual comp. Must also increase vesting to either 2-6 graduated or 3 yr cliff
48
Top Heavy DB: James has 10 years of service & average comp of $100k. What’s the mandatory ER benefit?
$100k x 2% x 10= $20,000
49
DC Plan Contribution Limits
$66,000 (2023) Consists of ER, EE, & any forfeitures allocated $66,000 + $7,500 (catch up) = $73,500
50
Mary age 29 earns $200k/year and has 401k. Her company made a 20% contribution to all EE’s and allocates $6,000 of forfeitures to her profit sharing plan. What’s the max Mary can contribute to 401k plan?
$200k x 20% = $40k $40k + $6k= $46k ER $66k (max) - $46k = $20k she can defer
51
Pension Plans Actuary
Determines plan funding range Assumptions Required Annually: - DB Pension Plan - Cash Balance pension plan Required at Inception: - Target Benefit Pension No other plans require an actuary
52
Pension Plan SS Integration: Excess Method
Provides excess benefit to participants whose earnings are in excess of the SS wage base Used by both DB and DC plans
53
Pension Plan SS Integration: Offset Method
Reduces benefit to EE’s whose earnings are below the SS wage base Only used by DB plans
54
Cash Balance Pension Plan Characteristics
DB Plan Mandatory Funding Benefit based on an annual guaranteed contribution rate & guaranteed earnings on the contributions. Quasi-Separate Accounts - Participants see hypothetical account with hypothetical earnings - Actuarially determined Favors Younger plan entrants Uses 3 year cliff
55
Money purchase plan
DC Pension plan Mandatory annual funding of fixed % of total employer covered up to 25% Participant bears invest risk Separate accts Favors younger entrants
56
Target Benefit Pension Plan
Special type of Money Purchase Pension Determines contribution based on participant age Participant bears investment risk Favors older entrants Need actuary at inception of plan

CFP Retirement & Income Planning (4 decks)

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