Rpa 1 - Chapters 6 And 7

Front 1

3 basic profit-sharing plan approaches

Back 1

(1) Current (cash). Here, profits are paid directly to employees in cash, check or stock as
soon as profits are determined (for example, monthly, quarterly, semiannually or
annually).
(2) Deferred. Under this approach, profits are credited to employee accounts to be paid
at retirement or other stated dates or circumstances (for example, disability, death,
severance or under withdrawal provisions).
(3) Combination. In the combination approach, part of the profit is paid out currently in
cash and part is deferred. This third alternative involves one plan with both current and
deferred features or is designed as two separate plans, one cash and the other deferred,
often covering the same employee groups.

Front 2

Coverage requirements and profit-sharing plans

Back 2

Because a profit-sharing plan must be for the exclusive benefit of employees and their
beneficiaries in order to qualify under the Internal Revenue Code (IRC), coverage requirements
must not result in discrimination in favor of highly compensated employees. Relatively few
profit-sharing plans impose a minimum age requirement, whereas almost all specify a service
requirement for participation. The IRC permits a minimum age requirement of up to age 21
and a service requirement of up to one year or two years if the plan provides for full and
immediate vesting and is not a cash or deferred arrangement.

Front 3

“Substantial and recurring” contributions

Back 3

A profit-sharing plan need not include a definite predetermined contribution formula as a condition for qualification under the IRC. It is not even necessary that contributions be based on profits. However, in the absence of a predetermined contribution formula, “substantial and recurring” contributions must be made to fulfill the requirement of plan permanency.

Front 4

Explain advantages of discretionary contributions to profit sharing

Back 4

The discretionary approach to making contributions to a profit-sharing plan is advantageous
in that it provides contribution flexibility. Contributions can be adjusted to reflect a firm’s current financial position and capital needs. Additionally, the discretionary approach assures that contributions will not exceed the maximum amount allowed as a deductible expense for federal income tax purposes.

Front 5

Forfeitures under profit-sharing plans

Back 5

Employee forfeitures occur in a profit-sharing plan when employees terminate with less than full vesting.

Front 6

Integration of profit-sharing plans with Social Security

Back 6

Any portion of a profit-sharing plan that consists of a cash or deferred arrangement (CODA) may not be integrated with Social Security.

Front 7

Loans into a profit sharing plan

Back 7

In addition to restrictions on loan amounts, there are other requirements applicable to qualified profit-sharing plan loans. Plan loans must be available to all participants on a
reasonably equivalent basis, and loans may not be made available to HCEs in a percentage greater than that made available to other employees. The law also stipulates that the loan bear a reasonable rate of interest, be adequately secured and be made only by the plan. Note that a loan by a third party, such as a bank, using the employee’s account balance a security is prohibited.

Front 8

Provision for distributions from a profit-sharing plan

Back 8

n

Front 9

Statutory relief from liability for employee investment decisions

Back 9

A plan sponsor may receive statutory relief from liability for poor investment choices by plan participants by complying with regulations issued by DOL. These regulations generally require that a plan offer:
(a) At least three diversified categories of investment with materially different risk and return characteristics
(b) Participants have the right to change investments at least quarterly—more often if needed because of the volatility of a particular fund. Regulatory liability protection can be afforded to employer stock if the shares are publicly traded in a recognized market and if the plan also offers the three required options; however, all purchases, sales, voting and related share activities must be implemented confidentially through a fiduciary. Failure to comply with the DOL regulations does not mean that fiduciaries are automatically liable. It simply means that the regulatory safe harbor for liability attributable to participants’ investment choices is not available. Also, compliance does not relieve the employer of responsibility for ensuring that the investments are prudent and properly
diversified.

Front 10

Limits on deductibility of employer contributions

Back 10

n

Front 11

Contribution carryover

Back 11

n

Front 12

Taxation of distributions from a profit-sharing plan

Back 12

n

Front 13

Termination of a profit-sharing plan

Back 13

n

Front 14

Incidental life insurance and profit-sharing plans

Back 14

n

Front 15

Tax characteristics common to money purchase pension plans and defined benefit plans

Back 15

n

Front 16

Tax and general characteristics common to money purchase pension plans and defined contribution plans

Back 16

n

Front 17

In-service withdrawals not permitted

Back 17

n

Front 18

Restrictions on investments in employer securities

Back 18

n

Front 19

Qualification of profit-sharing plans for tax exemption under Section 401 of the
Internal Revenue Code is restricted to deferred or combination type plans.

Back 19

Memorize

Front 20

What are the 2 ways to contribute to a profit sharing plan?

Back 20

discretionary basis
or
in accordance with a definate predetermined formula

Front 21

Advantages fo definite [redetermined formula in contributing to a profit sharing plan

Back 21

The advantages of using a definite predetermined formula are that such a formula raises employee morale and feelings of security since they can readily calculate anticipated plan contributions based on measured operating results. Employees may feel that, without a definite formula, they cannot count on a share of the firm’s profits.

Front 22

While the Internal Revenue Service does not require a profit-sharing plan to include a definite contribution formula for qualification, it is necessary that a profit-sharing
plan include a definite allocation formula to become qualified.

Back 22

Memorize

Front 23

Profit sharing non discrimination-in-contributions

Back 23

In general, most profit-sharing plans do not have difficulties passing the nondiscriminationin-
contributions requirements because profit-sharing plans usually allocate contributions on the basis of a uniform percentage of pay with the same vesting schedule and years-of service definition applying to all participants.

Front 24

What are the requirements if a profit sharing's plan allocation formula is weighted on age and/or sevice?

Back 24

If the allocation formula is weighted for age and/or service and for units of pay that do
not exceed $200, the plan will meet the nondiscrimination requirements if the average
of the allocation rates for highly compensated employees (HCEs) does not exceed the average of the allocation rates for the nonhighly compensated employees (NHCEs).
Otherwise, the plan will have to meet the testing requirements of Section 401(a)(4).

Front 25

How do profit sharing plans intergrated with SS meet the nondiscrimination requirments?

Back 25

For purposes of these requirements, a profit-sharing plan that has an integrated allocation formula that meets the permitted disparity requirements of Section 401(l)
will be considered to have a uniform percentage allocation formula.

Front 26

How can plan sponsers of profit sharing plans dispense forfeitures?

Back 26

Plan sponsors may use employee forfeitures either to reduce employer contributions or may reallocate the forfeitures among remaining plan participants.

Front 27

What is the typical thing to do with foreitures in profit sharing plans?

Back 27

Profit-sharing plan sponsors typically reallocate forfeitures among remaining participants. Generally, these reallocations are determined on the basis of pay of each remaining participant in proportion to the total pay of all remaining participants.

Front 28

What can profit sharing participants withdraw?

Back 28

Profit-sharing plan participants may withdraw a portion of their vested benefit while still actively employed. The regulations permit distributions from a qualified profit-sharing plan “after a fixed number of years.” The Internal Revenue Service has interpreted this to mean that accumulations cannot be distributed in less than two years. Therefore, if contributions have been credited to an employee’s account for three years, he or she can withdraw an amount equal to the first year’s contribution and the investment income credited in that year provided the plan allows in-service withdrawals. Tax law also permits the withdrawal of funds upon the happening of an event such as hardship or, as interpreted by the IRS, upon the completion of five years of plan participation.

Front 29

Limits on the amount of a loan from a profit sharing plan without triggering a taxable event

Back 29

Employee loans are treated as taxable distributions unless certain requirements are met. These requirements involve the amount of the loan (or accumulated loans), the agreement concerning loan terms and the time period for repayment. The maximum amounts that can be borrowed without being considered a distribution depend on the amount of the employee’s vested interest in his or her account balance.

Front 30

Max repayment period for profit sharing loans

Back 30

Loans must be repaid within five years, have substantially level amortization and have payments that are made at least quarterly. If the loan is used to acquire a principal residence of the participant and meets the amount limitation, the five-year time limit does not apply.

Front 31

Explain the restrictions on the amount profit-sharing participants may invest from their plan in life and health insurance.

Back 31

If a profit-sharing participant invests in life and health insurance with funds that have accumulated for less than two years, additional IRS requirements must be met. IRS requires that amounts used to purchase life or health insurance be “incidental.” IRS has defined incidental as being one of the following:
(a) If only ordinary life insurance contracts are purchased, the aggregate premiums in the case of each participant must be less than one-half the total contributions and forfeitures allocated to his or her account.
(b) If only accident and health insurance contracts are purchased, the payments for premiums may not exceed 25% of the funds allocated to the employee’s account.
(c) If both ordinary life and accident and health insurance contracts are purchased, the amount spent for the accident and health premiums plus one-half of the amount spentfor the ordinary l ife insurance premiums may not, together, exceed 25% of the fund allocated to the employee’s account.
Additionally, an ordinary life insurance contract will be considered as incidental only if the plan requires the trustee to convert the entire value of the life insurance contract at or before retirement into cash, or to provide periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement, or to distribute the contract to the participant.