Chapter 1: Qualified Plan Requirements and Regulatory Considerations

Question 1

What does the IRS do for QRPs?

1.1

Answer 1

Supervises

Monitors

Governs the tax aspects

Question 2

What is ERISA?

1.1

Answer 2

• A law that governs non-tax aspects
• Also monitors group health and welfare plans
• Their goal is to protect the interest of the retirement participants

Question 3

What is the Department of Labor?

Answer 3

• Enforces ERISA reporting and disclosure
• Oversees prohibited transaction rules
• Regulates plan fiduciaries
• Issues communications to explain ERISA

Question 4

What is the PBGC?

1.1

Answer 4

• Insures plans
• Like the FDIC for DB retirement plans and cash balance plans
• Backed by the fed
• Doesn’t cover PSC
• It can terminate a plan if the min funding amounts are not met or if it can’t pay benefits when they are due.
• Doesn’t cover defined contribution plans

Question 5

Types of plans include:

1.1

Answer 5

• Qualified Plans
• Tax Advantage Plans
• Nonqualified Plans

Question 6

What is a Qualified Plan? 1.1

Answer 6

• Meets the requirements of 401(a)
• Meets ERISA requirements
• Employer can deduct money that goes in
• Employee pays taxes when they pull money out
• Grows tax deferred

Question 7

What is a tax-advantaged plan? 1.1

Answer 7

Similar to qualified

Question 8

What is a non-qualified plan? 1.1

Answer 8

Doesn’t have to meet the qualified requirements

NO deduction for the employer until the worker is taxed

Can discriminate

Question 9

What are the attributes of a qualified versus a nonqualified plan?

1.2

Answer 9

Qualified plans:

• CAN’T discriminate
• Subject to ERISA
• Immediate employer deduction
• Employee deferral of tax and earnings
• Funding is required by due date of tax return
• Distributions are taxed as ordinary income

Question 10

What are the main ERISA and IRC requirements that apply to qualified plans?

Answer 10

1. Eligibility
2. Coverage
3. Limitations on contributions and benefits
4. Vesting requirements
5. Top-heavy plans
6. Integration with Social Security rules

Question 11

What are eligibility requirements?

1.2

Answer 11

• 21
• 1 year of service (at least 1000 hours of work)

Question 12

What are coverage requirements?

1.3

Answer 12

They look at either

1. HCE versus key employees
2. 5% owners versus 1% owners

Question 13

What makes you a highly compensated employee?

1.3

Answer 13

If you meet any of these requirements:

You’re in the top 20% of compensated people at the company.

or you are a 5% owner

Question 14

What are the three coverage tests?

1.3

Answer 14

1. Percentage test
2. Ratio test
3. Average benefits percentage test

You only have to meet one of these to be a qualified plan

Question 15

What is the coverage rule for 401k plans?

1.3

Answer 15

If you are elibiligle to contribute, you are considered covered even if you aren’t actually contributing.

Question 16

What is the percentage test?

1.3

Answer 16

At least 70% of the non-HCEs are covered.

Question 17

What is the ratio test?

1.3

Answer 17

The percent of non-HCEs that are covered is at least 70% of the HCEs that are covered.

Question 18

What is the average benefits test?

1.3

Answer 18

The average benefits for non-HCEs is at least 70% of the average benefits for HCEs.

Question 19

What is the 50/40 test?

1.3

Answer 19

This is only for defined benefit plans

50 people or 40% of your people are covered.

Question 20

What are the limitations on DB retirement plans?

1.3

Answer 20

• It can’t cover more than $290k
• You can’t promise yourself more than 100% of your highest 3 consectuvie years of salary—limited at $230k
  *

Question 21

What is the contribution limit for DC plans?

1.3

Answer 21

$58k total

Doesn’t include catchup contributions

Question 22

How do employer contributions vest? What are the different schedules?

1.3

Answer 22

DB Plans

• 5-year cliff or
• 3-7 year graded

DC Plans

• 3-year cliff
• 2-6 year graded

automatic vesting on plan termination

Question 23

What are key employees?

1.3

Answer 23

Any of the following

• Officer making more than $185k
• Greater than 5% owner
• 1% owner with comp more than $150k

Question 24

What happens if a plan is top-heavy?

1.3

Answer 24

It’s top-heavy when more than 60% of the benefits are going to key employees.

In DB plans:

• The vesting schedule changes from 3-7 to 2-6
• must provide a min defined benefit accrual of 2% times the number of years of service, up to 20% for all non key employees

In DC plans:

• Doesn’t make a difference for vesting
• The non-key employees must get at least a 3% contribution

Question 25

What are the requirements for integrating a retirement plan with social security? 1.3

Answer 25

* Social security stops at the taxable wage base ($137k in 2020) * So the social security Excess benefit percentage = the base percent + permitted disparity

Question 26

What are social security integration limits? 1.3

Answer 26

DB plans: * Max permitted disparity between benefit percentage is 25% of 1% x years of service up to 35 years DC plans: * Excess percentage cannot exceed the lesser of * two times the base percentage * base percentage plus 5.7%

Question 27

How do you establish a qualified plan? 1.4

Answer 27

Get an Advanced Determination Letter from the IRS or adopt a master or prototype plan (these are standardized plans)

Question 28

What are reporting and disclosure requriemtns? 1.4

Answer 28

* Summary plan description (spd) within 120 days * Annual report (Form 5500 series) to the IRS * Summary annual report (SAR) to participants * DC Plans must provide quarterly statements if people are directing their own investments * Summary of material modification (SMM)- explains changes in the plan, issued as needed.

Question 29

When can investment adviosrs recommend their own funds?

Answer 29

* Advisor fees must be neutral * Unbiased computer model (IRAs can only use neutral fee option) Advisors are held to the prudent standard

Question 30

What are prohibited transaction rules? 1.4

Answer 30

* Certain transactions between qualified plan and party in interest or fiduciary * Participant loans have to meet the IRC code 15% penalty until the plan is corrected Fiduciaries are personal liable for these penalties Prohibited transactions include: * sale or exchange of property between a plan and a dsqualified person * the sale of undeveloped land * Loans between the plan and any party in interest * transfer of plan assets or use of plan assets for the benfit of a party in interest * the plans acquisition of employer securities or real proeoperty in excell of legal limits * self-dealing

Question 31

What is the max deductible contributions that an employer can make?

Answer 31

25% of aggregate covered payroll

Question 32

What is a defined benefit plan vs a defined contribution?

Answer 32

DB: The employer is promising a defined benefit like annuity payments to the employer. They aren't necessarily putting money away.. DC: the employer actually contributes to the employees' plan (401k)

Question 34

Who issues Prohibited Transaction Exemptions? (ptes)

Answer 34

Department of labor

Question 35

What is the 50/40 test?

Answer 35

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

Question 36

How is a percentage owner defined when thinking about HCE employees?

Answer 36

Either 5% owner or 1% owner For IRS purposes, if an individual owns 2% of the company, the taxpayer is considered a 1% owner and if an individual owns 7% or 90% of a company, the taxpayer is considered a 5% owner.

Question 37

How rapidly does a non top heavy qualifed defined **benefit** plan need to vest?

Answer 37

**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-to seven-year graduated or graded vesting.** Using this schedule, the plan must provide vesting that is at least as fast as those listed in the following table

Question 38

How rapidly does a defined contribution plan need to vest?

Answer 38

* Three year cliff vesting schedule * two-six year graded vesting schedule If a defined benefit pension is top heavy, it also uses this schedule

Question 39

Explain contributory vs Noncontributory plans

Answer 39

Contributory: Employees can contribute Noncontributory: employer pays all Most pension and profit sharing plans are noncontributory. Common exception is 401k plan