Qualified Plans

Question 1

What are the 4 types of pension plans?

Hint: there are two each of two different types.

Answer 1

Defined Benefit Plans

• Defined Benefit Plans
• Cash Balance Plans

Defined Contribution Plans

• Money Purchase Plans
• Target Benefit Plans

Question 2

What are the 7 types of profit sharing plans?

Answer 2

• Profit sharing plans
• Stock bonus plans
• Employee stock ownership plans (ESOPs)
• 401(k)
• Thrift Plans
• New comparability plans
• Age-based profit sharing plans.

Question 3

Is a 403(b) a qualified plan?

Answer 3

No.

Question 4

What are the legal premises of pension and profit sharing plans?

Answer 4

• Pension plans pay a benefit for life.

- Profit sharing plans are based on deferral of compensation

Question 5

Do pension and profit sharing plans allow in-service withdrawals?

Answer 5

Pension plans generally don’t, but defined benefit plans do after age 59.5.

Profit sharing plans do after 2 years (if plan allows).

Question 6

Are pension plans and profit sharing plans subjected to mandatory funding rules?

Answer 6

Pension plans - yes.

Profit sharing plans - no.

Question 7

What % of the plan can be invested in employer securities?

Answer 7

Pension plan - 10%

Profit sharing plan - up to 100%

Question 8

Must the plan provide joint and survivor annuities?

Answer 8

Pension - yes

Profit sharing - no.

Question 9

Can pension plans be either defined benefit or defined contribution?

Can profit sharing plans?

Answer 9

Yes

No

Question 10

What are the contribution limits for defined benefit and defined contribution plans?

Who assumes the risk?

Are accounts co-mingled or separate?

Answer 10

DC Plans:

• contribution limit = 25% of covered comp.
• Employee assumes risk.
• Accounts are individual and separate.

DB Plans

• contribution limit = Not less than the unfunded current liability.
• ER assumes risk.
• Accounts are co-mingled.

Question 11

How are forfeitures allocated between DB and DC plans?

Can you be given credit for prior service?

Are the plans subject to PBGC coverage?

Answer 11

DB plans:

• Forfeitures are used to reduce plan costs.
• You can get credit for prior service
• Covered by PBGC

DC plans:

• Forfeitures can be used to pay costs or given to employees.
• No credit for prior service
• No PBGC coverage

Question 12

What are the advantages of qualified plans?

Answer 12

For the ER:

• No payroll tax on contribution.
• Tax deduction for for contribution.

For the EE:

• Pre-tax contribution opportunity.
• Tax deferred earnings
• ERISA protection.

Question 13

What are the ER trade-offs for the tax advantages of QP’s?

Answer 13

They agree to vesting, funding, eligibility, and non-discrimination compliance guidelines by the IRS.

Question 14

What are employee payroll taxes?

What are employer payroll taxes?

What is the tax break for qualified plan contributions?

Answer 14

• 6.2% OASDI on income up to $142,800 for 2021.
• 1.45% Medicare on all income.
• Additional .9% Medicare tax on incomes over 200k single, 250k MFJ

ER’s are required to match the first two, but not for contributions to qualified plans up to 25% of covered comp for both ER’s and EE’s so 15.3% tax savings

Question 15

When are qualified plan assets NOT protected from creditors?

Answer 15

• Divorce, child support (QDRO)
• Federal tax levy
• Crime related to plan.

Question 16

How are the protections of qualified plans from the protections of IRA’s?

Note: IRA types include traditional, Roth, SEP and SIMPLE.

Answer 16

Qualified plans are protected under ERISA.

A 2005 bankruptcy protection act covers IRAs.

Question 17

What are the disadvantages of QP’s?

Answer 17

• Limited investment options.
• No or limited access to money while working.
• Distributions taxed as OI
• Early withdrawal penalties.
• Mandatory distributions at 72.
• No step-up basis at death.
• Income and estate taxes at death

Question 18

What are the 4 requirements for qualified plans?

Answer 18

Eligibility, coverage, vesting, plan funding limits.

Question 19

What is the standard eligibility requirement for QP’s?

Answer 19

Age 21 + 1,000 hrs in 12 mos.

Question 20

Beginning in 2021, how do LT part-time employees become eligible?

Answer 20

500+ hrs/yr for 3 consecutive years.

Yrs begin in 2021, earliest eligibility in 2024.

Question 21

What are QP plan entrance date requirements?

Answer 21

No employee has to wait more than 6 months past the time they become eligible to enter the plan.

Therefore, most plans have 2 entrance dates/yr.

Question 22

What is the 2-year exception for plan entrance dates?

Are 401k’s eligible for it?

Answer 22

A plan may require an employee to wait 2 years to become eligible, but if they do this, they must be 100% vested when they enroll.

401k’s cannot do this.

Question 23

What are the 3 coverage tests for a qualified plan?

Answer 23

1. the general safe harbor test, ≥ 70% of eligible NHCs are covered.
2. The ratio % test (or the people test) % of NHC covered ÷ % HC covered ≥ 70%
3. Average benefit % test
   - AB% NHC ÷ AB% HC ≥ 70%.
   - Nondiscriminatory test.

Question 24

Who are HC employees?

Answer 24

• > 5% owner (including family attribution), current year OR PREVIOUS YEAR.
• Earns more than $130,000

Question 25

What is the special election employers can make about how to define HC’s? What about > 5% owners in the special election?

Answer 25

They can stipulate that anyone who is over the income limit and in top 20% of compensated employees is HC. > 5% owners are always HC.

Question 26

What is the additional test that DEFINED BENEFIT plans must pass to be qualified?

Answer 26

The 50-40 test. They must cover the lesser of 50 people or 40% of their employees.

Question 27

What is vesting? What are always 100% vested?

Answer 27

Vesting is the transfer of ownership of plan assets from employer to employee. EE contributions and their earnings are always 100% vested.

Question 28

What are the 2 DC plan vesting schedules? What if the 2-year election is used?

Answer 28

For DC plans, the 2 vesting schedules are 2-6 year graduated, and 3-year cliff. Under 2-6 year graduated, employee gains 20% ownership every year from years 2-6. Under 3-year cliff, EE is 100% vested after 3 years, not vested at all before. EE’s are always 100% vested if 2-year election is used.

Question 29

What are the vesting schedules for DB plans? What if the plan is top-heavy? What about Cash Balance plans?

Answer 29

DB plans use either 3-7 year graduated or 5-year cliff. Top heavy plans must use 2-6 year graduated or 3-year cliff. Cash Balance plans must use 3-year cliff.

Question 30

Can a plan vest faster than the vesting schedules allow?

Answer 30

Yes, as long as the employee is more vested than BOTH vesting schedules at every year.

Question 31

When do ‘years of service’ begin for vesting purposes? What years don’t count?

Answer 31

Years of service begin when EE is hired, NOT when they become eligible. You don’t have to count yrs b4 ER had a plan, or years when EE was under 18 and did not contribute, or years when he didn’t contribute to employee contributory plan.

Question 32

What is a key employee? What is the term ‘key employee’ used for?

Answer 32

A key employee is - >5% owner - > 1% owner with salary in excess of 150k - An office with compensation in excess of 185k A key employee is used to determine if a plan is top-heavy.

Question 33

What makes a plan top heavy?

Answer 33

For DB, > 60% of accrued benefits are for key employees. For DC, > 60% of acct. balances are for key employees.

Question 34

What must a top-heavy plan do?

Answer 34

If DB, use 2-6, and 3-cliff vesting + provide benefit to non-keys of .02 x years of service x compensation over testing period. If DC, a contribution = to the lesser of 3% compensation or that of key employees.

Question 35

What is the maximum benefit of the DB plan for one year?

Answer 35

Lesser of: 230K or average of 3 highest salary years (within covered comp limit).

Question 36

What is the maximum PER PARTICIPANT contribution to a DC plan?

Answer 36

Lesser of: 100% of their wages or 58k (+ 6,500 catch-up for 50+).

Question 37

What is the maximum ER contribution to a DB plan?

Answer 37

25% of total comp. 25% of covered comp. is the max they can deduct.

Question 38

What are Controlled Groups? What is the ownership % that determines a controlled group?

Answer 38

Businesses that are lumped together for qualified plan rules: - Parent and subsidiary companies (80% ownership) - Brother-sister companies (5 or fewer people own 80% of stock in two companies). - Combined group (3 or more companies in multiple parent/subsidiary, brother/sister relationships).