Qualified Plan Rules and Options

Question 1

Age and Service Requirements and Minimum Participation

Answer 1

• employees must be made eligible to participate after they reach age 21 or complete 1 year of service (whichever is later)
• an employer may require that employees have two years of service, but then that plan must make employees fully vested immediately.

Question 2

Qualified Plans minimum coverage requirements

Answer 2

• for a plan to receive tax-advantaged treatment is must not discriminate in favor of highly-compensated employees.
• plans can always discriminate in favor of of employees who are not highly compensated

Question 3

Highly Compensated Employees (HCEs)

Answer 3

-those owning more than 5% of the employer or those whose compensation exceeds $120,000 and who are among the 20% highest paid employees

Question 4

Coverage Tests for Qualified Plans

Answer 4

• a plan must pass one of three tests:
• percentage test: the plan must benefit at least 70% of non-HCE employees
• Ratio Test: the percentage of non-HCEs covered by the plan must be at least 70% of the percentage of the HCEs covered. Thus, if 80% of the HCEs are covered, at least 56% of the non-HCEs must be covered to satisfy this test
• Average Benefits Test- the average benefit percentage provided to non-HCEs must be at least 70% of the average benefit percentage provided to HCEs.

Question 5

Defined-Benefit Plans Minimum Participation

Answer 5

• must pass one of the three coverage tests plus an additional test.
• the plan must cover at least 50 employees or 40% of all employees, whichever is less.

Question 6

Cliff Vesting

Answer 6

-gives full right to benefits after 3 years of service.

Question 7

Graded Vesting

Answer 7

• provides for 20% of the employer contributions to become vested after the second year of service and 20% for each year after that.
• Makes the employee fully vested after 6 years of service.

Question 8

Vesting for Defined-Benefit Plans

Answer 8

• rules allow for 5-year cliff vesting and 3 to 7 year graded vesting
• cash balance plans must follow the 3 year cliff or 6 year graded
• when a plan is top heavy , the vesting must change to 3 year cliff and 6 year graded.

Question 9

Discrimination Testing (ADP Testing)

Answer 9

• if the percentage deferred by non-HCEs is 8% or more, then the actual percentage of compensation deferred by HCEs in the current year cannot be more than 125% of the percentage of compensation deferred by non-HCEs in the previous year
• in the percentage deferred by non-HCEs is between 2-8% then the actual percentage of compensation deferred by HCEs in the current year cannot be more than the percentage of compensation deferred by non-HCEs in the previous year plus 2%
• If the percentage deferred by non-HCEs is less than 2% then the actual percentage of compensation deferred by non-HCEs in the current year cannot be more than 200% of the percentage of compensation deferred by non-HCEs in the previous year.

Question 10

Actual Contribution Percentage (ACP testing)

Answer 10

• makes use of the ADP test, but uses the after-tax employee contributions and/or the employer matching contributions instead of just the deferral.
• employers comply if they match 100% of an employees contributions up to 3% of compensation, and 50% of the employee’s contributions between 3-5%.

Question 11

Controlled Groups

Answer 11

• employers who are part of a control group must aggregate their retirement plans for discrimination testing
• aggregation is also required when one entity owns 80% of another entity or when the same five or fewer owners own 80% of both entities, and 50% of each entity is held by owners with identical holdings in the other entity.

Question 12

Defined Benefit Social Security Integration Excess Method

Answer 12

• a monthly benefit is determined using a table published in the regulations, and a base percentage and an excess percentage can be applied to the monthly benefit.
• the maximum disparity is 75% for each year up to 35 years, or 26.25%

Question 13

Defined Benefit Social Security Integration Offset Method

Answer 13

• the defined benefit is reduced by a percentage of the social security benefit that a participant will receive at age 65.
• the reduction can never be more than 50% of the benefit

Question 14

Defined-Benefit Limits

Answer 14

• the maximum benefit from a defined benefit plan cannot exceed the lesser of
  1) $215,000
  2) 100% of the participants average compensation for the three highest-paid consecutive years.
• The $215,000 limit is reduced for early retirement and raised for delayed retirement after age 65.

Question 15

Top-Heavy Plans

Answer 15

• a plan is considered top heavy when more than 60% of either the present value of the cumulative accrued benefits (defined benefit plans) or the aggregate account balances (defined contribution plans) are for the benefit of key employees
• if the plan is found to be top heavy on the last day of the year, then special rules apply to the next year.

Question 16

Key Employees

Answer 16

• officers of the company who earn more than $175,000 per year
• a 1% owner of the company with the annual compensation of $150,000 or more
• a more than 5% owner of the company

Question 17

Top-Heavy Vesting

Answer 17

• when a plan is found to be top heavy, all participants must fully vest in all benefits after 3 years or must vest 20% after two years and 20% each year after that
• this applies for defined benefit and contribution plans

Question 18

Top-Heavy Rules for Defined Contribution Plans

Answer 18

• contributions to each employees account must be at least 3% of his or her compensation (subject to a maximum), or the percent of compensation contributed to key employees accounts, if less than 3%
• even employees who have not worked 1,000 hours receive this contribution

Question 19

Top-Heavy Rules for Defined Benefit Plans

Answer 19

-each non-key participant must receive an accrued benefit at least equal to the average of the five highest paid years, multiplied by 2% for every year the plan is top heavy, up to 10 years (with a maximum of 20% times the average of the five highest salaries)

Question 20

Super Top Heavy Plans

Answer 20

• Where 90% of the accrued benefits are allocated to key employees
• defined contribution plans contribute 4% to non-key employees
• For defined benefit plans, the average of the five highest-paid years is multiplied by 3%

Question 21

Loans

Answer 21

• a plan participant may borrow the lesser of:
  1) $50,000
  2) half of the vested account balance
• SEPs and SIMPLE plans do not allow loans

Question 22

UBTI

Answer 22

• gross income which is generated by a qualified retirement plan trust that is directly carrying on a trade or business not substantially related to the purpose of the trust
• Income from a non-real estate limited partnership interest
• dividends received from stocks purchased on margin

Question 23

Life Insurance

Answer 23

• in a qualified contribution plan no more than 50% of the annual plan contribution can be invested in ordinary or traditional cash-value life insurance. For term or universal life, no more than 25%.
• in a defined benefit plan the insurance can call for an amount of the anticipated monthly benefit.

Question 24

Standard Termination

Answer 24

• an employer must have sufficient assets to pay all plan benefits.
• if there are insufficient assets the employer can provide the deficiency in a single payment of if a 50% owner will agree to waive benefits.

Question 25

Distressed Termination

Answer 25

- the employer is being liquidated or reorganized in bankruptcy or insolvency proceedings - the employer is unable to pay debts when due and will not be able to stay in business - the employer can show that the cost of providing coverage is unreasonably burdensome as the result of a decline in workforce.

Question 26

Reversion Tax

Answer 26

-if a plan terminates with more assets than necessary to pay benefits, this amount is taxed at 50% or 20% if the employer shares the excess with employees.