Retirement Planning-Qualified Plan Requirements And Regulatory Plan Considerations

Front 1

Who are the two regulatory bodies on qualified plans

Back 1

The IRS for taxes and Department of Labor for compliance with ERISAs plan reporting and disclosure rules and compliance with transactions regulations

Front 2

What is the major concern of ERISA (employee retirement income security act)

Back 2

to protect retirement interests of participants. It established standards and curtailed potential plan abuse

Front 3

What is the pension benefit guaranty corporation

Back 3

Created by ERISA and insures plan participants against loss of benefits from plan termination in defined benefit plans ONLY. It can require additional premium if plan is unfunded. It can borrow from treasury

Front 4

What are nonqualified plans and provide examples

Back 4

They do not meet the IRC section 401 requirements, and are used to provide benefits to key employees beyond the qualified limits. AKA nonqualified deferred compensation plans
Examples are SARSEP SIMPLE IRA, Traditional IRA and 403B and Sec 457

Front 5

What are the requirements for a qualified plan

Back 5

eligibility, coverage, participation, vesting, reporting/disclosure and fiduciary requirements.

Front 6

Who is considered a HCE, highly compensated employee in qualified plans

Back 6

GREATER than 5% owner or compensation greater than $115K. If ER makes election, only persons in top 20% of compensation and earnings greater than $115 are included in highly compensated. The 20% election only removes a participant from HCE group if the participant qualifies as HCE based on income only will not be done for ownership.

Front 7

What are the coverage requirements under the qualified plan

Back 7

Must pass 1 of three tests P R A
percentage = coverage must >/= 70% of NHCEs
R=ratio test % NHCEcovered/% of HCE covered must >/= 70%
A= Average benefits test % benefits NCHE.% Benefits HCE must >/= 70%

Front 8

What is the additional test that a defined benefits plan must meet

Back 8

The 50/40 test. the lesser of 50 employees or 40% of all eligible employees must be covered. May exclude unions and nonresident aliens

Front 9

What is the purpose of the controlled group rules

Back 9

to prevent discrimination against nonhighly compensated employees through the use of separate entities.

Front 10

What is the deferral limit for section 401K plans in 2013

Back 10

$17500 plus catch up for participants age 50 and older of $5.5K

Front 11

What are the limits in benefits paid in defined benefit plans

Back 11

Cannot exceed the LESSER of 100% of participants compensation averaged over the three highest consecutive years to a max of $205K annualy

Front 12

What are the limits of contributions in defined contributions plans

Back 12

$51K annually or 100% of annual compensation. Annual additions include ER contributions; EE contributions and forfeitures allocated to the participant's account. Employee is limited to maximum amt of elective deferral. If more than one ER, employers do not have to coordinate amounts

Front 13

What is the limit of the deduction for DC retirement plans that the employer can take?

Back 13

25% of the aggregate payroll

Front 14

What are the minimum vesting requirements for defined benefit plans

Back 14

5-year 100% clif or 3-7 year graduated (graded) vesting.. starting at 3 years of service at 20% vesting to 7 SY at 100% vesting. Note that if a two year eligibility rule is used 100% immediated vesting is required upon date of employee enrollment

Front 15

What are the minimum vesting requirements for defined contribution plans

Back 15

3-year clif or 2-6 year graduated vesting. With a three year cliff vesting schedule, no vesting is required b4 three SYs. Then 100% vested

Front 16

How are key employees defined

Back 16

an officer with a salary greater than $165K, a greater than 5% owner, a greater than 1% owner with a salary of greater than $150K. The number of officers that are key EEs is limited to 50 or the greater of 3 or 10% of EEs

Front 17

When is a plan considered top heavy?

Back 17

A DB plan that provides more than 60% of benefits or a DC plan wherein aggregate account balances of key EEs exceeds 60% of the aggregate account balances of all EEs

Front 18

What are the permitted disparity rules in terms of integration with social security

Back 18

Qualified plan benefit or contribution formulas can be integrated with SS (with some exceptions). An integrated plan is intended to remedy the inequality of SS (favoring lower income) by allowing a greater percentage of employer contribution to be made on behalf of HCE than on behalf of non HCE

Front 19

What are the methods of integration of qualified benefit plans.

Back 19

The excess method and the offset method. The excess method defines a level of compensation (integration level usually the SS limit of $113.7K) then provides a higher rate of contribution and benefits for compensation above this level. DC can only use the excess method

The offset method uses a formula

Front 20

Regarding integration with SS, what is the maximum permitted disparity between the benefit percentage below and above the covered compensation level for both DB plans

Back 20

3/4 of 1% x SY up to 35 years or a max percentage difference of 26.25

Front 21

What is the maximum allowable excess percentage for DC plans

Back 21

The excess method provides higher contributions above the integration level than below the integration level. The benefit level below the integration level is called base percentage0. The excess percentage is limited to the lesser of 2x the base percentage or the base percentage plus 5.7%

Front 22

What are the major reporting and disclosure requirements under ERISA?

Back 22

1)a summary plan description SPD must be provided to all participants within 120 days after plan established or 90 days after a new participant enters an existing plan; 2)annual report form 5500 must be filed with IRS; 3) a summary annual report (SAR) must be provided to all participants; 4)an individual accrued benefit statement must be provided to participant within 30 days of request. Quarterly statements must be given to participants who direct their own investments and annually to those who cannot; 5) a summary of material modification (SMM) , which summarizes substantive changes provided as needed

Front 23

What are the prohibited transaction rules under ERISA

Back 23

1) sale, xchange or lease of any property btwn plan and a party in interest; 2) loans btwn plan and party in interest; 3) xfer of any plan assets or use of plan assets for the benefit of a part in interest 4) the plan's acquisition of employer securities or real property in excess of legal limits.

Front 24

How do qualified plans differ from nonqualified plans?

Back 24

Qualified plans cannot discriminate, are subject to ERISA, must be funded by due date, and have different tax benefits

Front 25

What would be considered annual additions to a defined contributions and what is the annual additions limit?

Back 25

ER contributions, EE contributions and forfeitures allocated to DC plan on behalf of the EE. Annual additionals cannot exceed 100% of participants annual compensation or $51K annually.

Front 26

What is one type of transaction that ERISA prohibits?

Back 26

Transactions between a qualified plan and a party of interest. A party of interest is adm, custodian, --does not include participant

Front 27

What are some of the requirements regarding loans from qualified plans?

Back 27

Generally maximum loan is $50K; 2)The term limit is 5 years; 3) generally loans to a owner-employee are permissable if not discriminatory

Front 28

Nick, age 38, earns $250,000 per year from a personally owned regular C corporation. He wants to establish a defined contribution plan. His three employees, each of whom earn $20,000, are between ages 22 and 26, and have been employed with the company for an average of four years. Which of the following vesting schedules would be the most appropriate for Nick's qualified retirement plan from the employer's perspective?
A) 2–6 year graduated vesting.
B) 3-year cliff.
C) 3–7 year graduated vesting.
D) 5-year cliff.

Back 28

2–6 year graduated vesting. Defined contribution plans must vest at least as rapidly as 3-year cliff vesting or 2-6 year graduated (also called graded) vesting. However, 3-year cliff vesting must provide 100% vesting after three years. This is too rapid for his purposes. Two-six year graduated vesting provides for 20% vesting at two years and increases 20% per year to 100% by year six. Because Nick's employees are very young and he will want to minimize employee turnover, it would be best for him to stretch out the vesting in order to provide an incentive for the employees to remain with the company. Therefore, the most appropriate vesting schedule in this case is 2-6 year graduated vesting.

Front 29

Richard has a traditional IRA that contains a portfolio of mutual funds with a current value of $107,000. He is expected to incur about $9,600 in medical bills in the next couple of months. Could Richard simply transfer the $9,600 from his IRA into an HSA and pay his medical bills with qualified tax free distributions from his HSA?

Back 29

) Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA for the maximum allowable annual contribution limit provided he has not already made his contribution for the year.
An individual can make a one-time, trustee-to-trustee transfer from a traditional IRA to an HSA. This transfer is not subject to income tax but it is limited to the maximum HSA contribution limit.

Front 30

What is the maximum annual benefit under a defined benefit plan

Back 30

average of the participants 3 CONSECUTIVE highest arning years. Limited max comp considered is $205K/year

Front 31

Stockwell Corporation is trying to establish a qualified pension plan and has identified the following criteria:
Simplicity; Integration with Social Security; Flexible funding; Ability to invest in company stock; In-service withdrawals; Distribution of benefits in cash if desired.
Deductible employer contributions.
Which of the following types of qualified plans would best meet Stockwell’s criteria?
ESOP.
Stock bonus plan.
Profit-sharing plan.
Money purchase plan.

Back 31

Only the profit-sharing plan will meet Stockwell's criteria because it is the only type of qualified retirement plan that allows funding flexibility.

Front 32

Which qualified plans must be covered by Pension Benefit Guarantee Corporation Insurance

Back 32

Defined benefit plans including cash balance plans

Front 33

Beauty Co. employs 200 nonexcludable employees, 20 of whom are highly compensated. Sixteen of the 20 highly compensated and 125 of the 180 non-highly compensated employees benefit from the Beauty Co. qualified pension plan. The average benefits accrued for the highly compensated is 8% and $9,000. For the non-highly compensated, the average accrued benefit is 3% and $3,000. Which of the following statements best describes the plan’s coverage?
A) Although the plan does not meet the ratio percentage test, it meets the average benefits test.
B) The plan does not meet the ratio percentage test.
C) The plan meets the ratio percentage test.
D) The plan does not meet the ratio percentage test or the average benefits test.

Back 33

C) The plan meets the ratio percentage test.
The plan meets the ratio percentage test. The percentage of highly-compensated employees covered by the plan is 80% (16 ÷ 20). The percentage of non-highly compensated employees covered by the plan is 69% (125 ÷ 180). The plan exceeds the 70% required by the ratio percentage test (69% ÷ 80% = 86%).

Front 34

Mama Mason's Inc., a regular C Corporation, is considering the adoption of a qualified retirement plan. The company has had fluctuating cash flows in the recent past, and such fluctuations are expected to continue into the future. The average age of nonowner employees is 24, and the average number of years of service is three, with a high of four and a low one. Approximately 25% of the 12-person labor force turns over each year. The two owners gross about 2/3 of the covered compensation. Which is the most appropriate plan for Mama Mason's?
A) Tandem plan (10% money purchase/15% profit-sharing).
B) Target benefit plan.
C) Profit-sharing plan.
D) Defined benefit plan.

Back 34

C) Profit-sharing plan. Because of the fluctuating cash flows, the most appropriate plan is a profit-sharing plan.

Front 35

During the current year, Bob had a cumulative IRA account balance of $450,000 as of December 31 of last year, turned age 70 on April 1 of this year, received a distribution of $15,000 from his IRA on December 31 of this year, and had a life expectancy of 23.5 years as of the same date. Which of the following statements regarding Bob’s minimum distribution requirement is CORRECT?
A) Bob is not subject to the minimum distribution rules.
B) Bob will not have a penalty for the current year, but he will need to withdraw the balance of his minimum distribution for the current year by April 1 of next year.
C) Bob will have a penalty (50%) of $5,000 that should be reported on his current year's federal income tax return because he failed to take the minimum distribution by December 31 of the current year.
D) Bob's distribution of $15,000 is sufficient to meet his minimum distribution requirement.

Back 35

B) Bob will not have a penalty for the current year, but he will need to withdraw the balance of his minimum distribution for the current year by April 1 of next year.
Bob will be age 70½ on October 1 of the current year, therefore he must take a minimum distribution from his IRA for the current year. Based on the IRA balance of $450,000 and a life expectancy of 23.5 years, the minimum distribution is $19,149. Bob took a $15,000 distribution this year, and he will not incur a penalty tax unless he fails to withdraw the remaining $4,149 by April 1 of next year.

Front 36

What are some of the similarities and differences between an ISO and a NQSO

Back 36

1. NQSO will NOT create an AMT adjustment upon excercise but ISOs will
2) Gain may be included in W2 wages upon exercise for Nqso but not ISOs
3) both NQSos and ISOs can be converted to stock and sold immediateely
4)The date of the option grant is not a taxable event for both an NQSO or ISO

Front 37

What is the role of the DOL

Back 37

Ensures compliance, defines prohibited transactions, governs the actions of plan fiduciaries and issues communications that explain existing laws.

Front 38

What is the difference in Form 5500, 5500SF and 5500EZ

Back 38

Form 5500 is for over 25 EEs, 5500-SF for 25 of fewer EEs, and 5500EZ for individuals or two partners but not for leased EEs or ERs that are part of a contrtolled groupr

Front 39

In addition to the form 5500, what additional paperwork is the plan administrator responsible for

Back 39

SPD smmary plan descriptionl SAR summary annual report (on form 5500), SMM summary of material modification. Each plan participant must be provided with an accrued benefit statement 30 days of request. In addition a schedule A must be provided for insurance companies

Front 40

What are the remedies of top heavy plans for defined benefit plans

Back 40

For DB-provide more rapid vesting such as 100% 3-yr vesting or 2-6 year graded vesting---replaces 5 yr clif and 3-7 graded

Front 41

What are the remedies of top heavy plans for defined contribution plans

Back 41

Minimum ER contribution is 3% of total compensation (or equal to HCE is less than 3%) All DC plans must use accelerated vesting (3-year cliff or 2-6 graded) whether or not top heavy)

Front 42

What are service years as they relate to vesting

Back 42

1000 hours within a 12 month period. Except when EE is less than 18 or years or b4 implementation of the plan

Front 43

Under what circumstance can there be multiple annual addition limits for a DC

Back 43

When tp has two separate sources of income (but not from a controlled group)

Front 44

Whart is a key question in determining if a plan is top heavy about the employer(s)

Back 44

which ERs are single ERs as opposed to being part of a controlled group. Controlled groups are deemed single ERs

Front 45

When must loans be paid back

Back 45

Most qualified plans, section 403b and 401k have loan provisions. All loans must be repaid within 5 years (except purchase of house) max loan is $50K or 50% of balance unless balance is $10K or less. Loans must be repaid in full upon separation . Nondeductible after tax EE contributions are not available for loans

Front 46

How are plans terminated

Back 46

DB-PBGC can involuntary terminate, bankruptcy, et

DC can terminate easy. but final contributions must be made.

Front 47

What are some of the prohibited transactions

Back 47

sale, xchange, lease, loan, transfer with party of interest. Acquisition of ER securities or real property in excess of legal limits. There are certain prohibited transaction exemptions given for investment advice given by RIA, institutions, insurance cos

Front 48

What are some of the responsibilities of the PBGC

Back 48

Insures participants/benes against partial or complete loss; 2) investigates violations o plan termination insurance provisions 3) can shut down plan

Front 49

What is one big advantage of DB plans

Back 49

can exclude part time EEs because of its vesting (5 cliff and 3-7 graded) requirement if not top heavy

Front 50

Which defined benefit plans do not have to be covered by PBGC

Back 50

A DB plan maintained by a professional service ER with 25 or less EEs

Front 51

Which benefits are not covered by PBGC

Back 51

Benefits added to a plan less than 5 years before distress termination.

Front 52

Would a merger of a money purchase pension plan to another plan be considered a termination?

Back 52

NO

Front 53

What is the covered compensation limited for qualified plans

Back 53

$255K

Front 54

What are the MINIMUM vesting schedules under DB plans

Back 54

A 5 year cliff and 3-7% graded. Note Cliff can be less generous. If company is top heavy, vesting schedule is more strict and the minimum becomes 3 year cliff or 2-6 graded.

Front 55

How is the ratio percentage test calculated and what does it test

Back 55

Tests coverage

%NHCE covered / %HCE covered must >/= 70 %

Front 56

How is the average benefits percentage test and what does it test

Back 56

It is a nondiscriminatory component of the tests

average % benefits NHCE/average benefits % HCE

Front 57

What is the general rule (safe harbor) that must be passed tested under Sec 410b regarding coverage

Back 57

ER must cover 70% of all nonexcludable NHCE

Front 58

What happens if the ER fails the safe harbor test

Back 58

ER must pass either the ratio percentage test or the average benefits percentage test

Front 59

What is the limit of the deduction for DB retirement plans that the employer can take?

Back 59

Contributions are limited to an amount determined actuarially required to eet minimum funding standards.

Front 60

What is needed to waive survivorship rights on a qualified plan

Back 60

Written permission from spouse

Front 61

Which plans have higher administration costs

Back 61

DB=highest, then qualified plans

Front 62

When does the vesting schedule begin

Back 62

As soon as the EE is employed if there is an existing plan. However service before implementation of a plan does not count